1
==========================================================================
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 March 31, 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 April 30, 2007
----- ----------------
Common Stock, $1.00 Par Value 259,106,759
==========================================================================
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MARSHALL & ILSLEY CORPORATION
CONSOLIDATED BALANCE SHEETS (Unaudited)
($000's except share data)
March 31, December 31, March 31,
2007 2006 2006
-------------- ------------- --------------
Assets
------
Cash and cash equivalents:
--------------------------
Cash and due from banks $ 1,084,659 $ 1,248,007 $ 1,017,005
Federal funds sold and security resale agreements 112,168 192,061 111,498
Money market funds 52,065 45,190 32,065
------------- ------------- -------------
Total cash and cash equivalents 1,248,892 1,485,258 1,160,568
Interest bearing deposits at other banks 17,703 19,042 15,766
Investment securities:
----------------------
Trading securities, at market value 117,297 36,249 40,373
Available for sale, at market value 7,079,653 6,977,853 6,039,645
Held to maturity, market value $460,310
($507,909 December 31, 2006 and $603,665 March 31, 2006) 449,868 495,520 587,090
------------- ------------- -------------
Total investment securities 7,646,818 7,509,622 6,667,108
Loans held for sale 268,951 300,677 159,117
Loans and leases:
-----------------
Loans and leases, net of unearned income 41,985,690 41,634,340 35,076,693
Allowance for loan and lease losses (423,084) (420,610) (368,760)
------------- ------------- -------------
Net loans and leases 41,562,606 41,213,730 34,707,933
Premises and equipment, net 575,983 571,637 500,261
Goodwill and other intangibles 3,245,471 3,212,102 2,483,873
Accrued interest and other assets 1,964,944 1,918,189 1,669,993
------------- ------------- -------------
Total Assets $ 56,531,368 $ 56,230,257 $ 47,364,619
============= ============= =============
Liabilities and Shareholders' Equity
------------------------------------
Deposits:
---------
Noninterest bearing $ 5,391,832 $ 6,112,362 $ 4,999,788
Interest bearing 27,243,468 27,972,020 23,099,196
------------- ------------- -------------
Total deposits 32,635,300 34,084,382 28,098,984
Federal funds purchased and security repurchase agreements 3,372,744 2,838,756 2,673,095
Other short-term borrowings 5,288,630 3,586,374 2,879,727
Accrued expenses and other liabilities 1,567,010 1,543,219 1,664,044
Long-term borrowings 7,313,758 8,026,155 7,185,939
------------- ------------- -------------
Total liabilities 50,177,442 50,078,886 42,501,789
Shareholders' equity:
---------------------
Series A convertible preferred stock, $1.00 par value;
2,000,000 shares authorized - - -
Common stock, $1.00 par value; 261,972,424 shares issued
(261,972,424 shares at December 31, 2006 and 245,115,086
shares at March 31, 2006) 261,972 261,972 245,115
Additional paid-in capital 1,780,949 1,770,540 1,003,367
Retained earnings 4,531,426 4,383,642 3,954,037
Accumulated other comprehensive income, net of related taxes (14,778) (17,546) (19,525)
Treasury stock, at cost: 5,196,118 shares
(6,502,732 December 31, 2006 and 9,029,759 March 31, 2006) (165,263) (205,938) (284,323)
Deferred compensation (40,380) (41,299) (35,841)
------------- ------------- -------------
Total shareholders' equity 6,353,926 6,151,371 4,862,830
------------- ------------- -------------
Total Liabilities and Shareholders' Equity $ 56,531,368 $ 56,230,257 $ 47,364,619
============= ============= =============
See notes to financial statements.
05/09/2007
3
MARSHALL & ILSLEY CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
($000's except per share data)
Three Months Ended March 31,
-------------------------------
2007 2006
--------------- --------------
Interest and fee income
-----------------------
Loans and leases $ 783,153 $ 590,400
Investment securities:
Taxable 77,054 57,868
Exempt from federal income taxes 14,861 15,999
Trading securities 133 70
Short-term investments 3,808 3,565
------------- -------------
Total interest and fee income 879,009 667,902
Interest expense
----------------
Deposits 290,025 198,779
Short-term borrowings 54,916 39,335
Long-term borrowings 143,758 104,655
------------- -------------
Total interest expense 488,699 342,769
------------- -------------
Net interest income 390,310 325,133
Provision for loan and lease losses 17,148 10,995
------------- -------------
Net interest income after provision for loan and lease losses 373,162 314,138
Other income
------------
Data processing services 356,373 342,980
Wealth management 60,706 52,799
Service charges on deposits 25,877 22,550
Gains on sale of mortgage loans 8,793 11,986
Other mortgage banking revenue 1,347 949
Net investment securities gains 1,584 1,130
Gains related to Firstsource 8,028 -
Life insurance revenue 7,520 6,966
Net derivative losses - discontinued hedges - (21,345)
Other 36,918 32,857
------------- -------------
Total other income 507,146 450,872
Other expense
-------------
Salaries and employee benefits 297,123 277,403
Net occupancy 26,981 24,881
Equipment 32,344 32,939
Software expenses 18,781 17,438
Processing charges 30,837 27,013
Supplies and printing 7,857 6,122
Professional services 14,999 11,449
Shipping and handling 25,425 23,902
Amortization of intangibles 11,281 8,875
Metavante transaction costs 1,465 -
Other 85,874 75,111
------------- -------------
Total other expense 552,967 505,133
------------- -------------
Income before income taxes 327,341 259,877
Provision for income taxes 110,579 86,805
------------- -------------
Net income $ 216,762 $ 173,072
============= =============
Net income per common share
---------------------------
Basic $ 0.85 $ 0.74
Diluted 0.83 0.72
Dividends paid per common share $ 0.270 $ 0.240
Weighted average common shares outstanding (000's) :
----------------------------------------------------
Basic 255,493 235,317
Diluted 261,330 240,343
See notes to financial statements.
05/09/2007
4
MARSHALL & ILSLEY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
($000's)
Three Months Ended March 31,
-------------------------------
2007 2006
--------------- --------------
Net Cash Provided by Operating Activities $ 208,958 $ 225,770
Cash Flows From Investing Activities:
-------------------------------------
Proceeds from sales of securities available for sale 8,449 5,449
Proceeds from maturities of securities available for sale 287,953 267,997
Proceeds from maturities of securities held to maturity 45,910 31,788
Purchases of securities available for sale (363,136) (382,317)
Net increase in loans (388,796) (1,196,779)
Purchases of assets to be leased (74,120) (36,680)
Principal payments on lease receivables 103,760 52,418
Purchases of premises and equipment, net (25,029) (27,858)
Acquisitions, net of cash and cash equivalents acquired (46,617) (1,462)
Other 4,542 (4,933)
------------- -------------
Net cash used in investing activities (447,084) (1,292,377)
Cash Flows From Financing Activities:
Net (decrease) increase in deposits (1,457,129) 437,890
Proceeds from issuance of commercial paper 1,993,136 901,035
Principal payments on commercial paper (2,015,742) (968,228)
Net increase in other short-term borrowings 301,429 44,827
Proceeds from issuance of long-term borrowings 1,598,615 750,000
Payments of long-term borrowings (369,773) (271,038)
Dividends paid (68,978) (56,374)
Purchases of common stock - (41,788)
Proceeds from exercise of stock options 22,802 19,101
Other (2,600) (2,601)
------------- -------------
Net cash provided by financing activities 1,760 812,824
------------- -------------
Net decrease in cash and cash equivalents (236,366) (253,783)
Cash and cash equivalents, beginning of year 1,485,258 1,414,351
------------- -------------
Cash and cash equivalents, end of period $ 1,248,892 $ 1,160,568
============= =============
Supplemental cash flow information:
-----------------------------------
Cash paid during the period for:
Interest $ 511,495 $ 344,307
Income taxes 14,078 9,408
See notes to financial statements.
05/09/2007
5
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements
March 31, 2007 & 2006 (Unaudited)
1. 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 months
ended March 31, 2007 and 2006. The results of operations for the
three months ended March 31, 2007 and 2006 are not necessarily
indicative of results to be expected for the entire year.
2. New Accounting Pronouncements
In February 2007, the Financial Accounting Standards Board ("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, although early adoption is
permitted. The Corporation intends to adopt SFAS 159 on January 1,
2008 and 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. 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 has elected to recognize the resulting gain of $8.0
million in the consolidated statement of income. All future SAB 51
gains or losses will be recognized in the consolidated statement of
income. Deferred income taxes have been provided on the gain.
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 utilizes 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 $1,387.6 million
and negative fair value of $37.5 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 $37.3 million at March
31, 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.
05/09/2007
6
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
March 31, 2007 & 2006 (Unaudited)
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
months ended March 31, 2006 net derivative losses - discontinued
hedges amounted to $21.3 million.
The aggregate impact of the adjustments is summarized below (dollars
in thousands, except per share data):
Previously As
As of and for the Three Months ended March 31, 2006 Reported Adjustment Adjusted
--------------------------------------------------- -------------- ------------ --------------
Loans and leases, net of unearned income $ 35,033,614 $ 43,079 $ 35,076,693
Accrued interest and other assets 1,683,034 (13,041) 1,669,993
Total deposits 28,093,163 5,821 28,098,984
Accrued expenses and other liabilities 1,616,073 47,971 1,664,044
Retained earnings 4,002,008 (47,971) 3,954,037
Accumulated other comprehensive (loss)
income, net of related taxes (43,742) 24,217 (19,525)
Net interest income $ 324,580 $ 553 $ 325,133
Net derivative losses - discontinued hedges - (21,345) (21,345)
Other income 33,410 (553) 32,857
Income before income taxes 281,222 (21,345) 259,877
Provision for income taxes 94,454 (7,649) 86,805
Net income 186,768 (13,696) 173,072
Net income per common share:
----------------------------
Basic $ 0.79 $ (0.05) $ 0.74
Diluted 0.78 (0.06) 0.72
5. Comprehensive Income
The following tables present the Corporation's comprehensive income
($000's):
Three Months Ended March 31, 2007
------------------------------------------
Before-Tax Tax (Expense) Net-of-Tax
Amount Benefit Amount
-------------- ------------- -------------
Net income $ 216,762
Other comprehensive income:
Unrealized gains (losses) on available
for sale investment securities:
Arising during the period $ 17,652 $ (6,247) 11,405
Reclassification for securities
transactions included in net income (615) 215 (400)
------------- ------------ ------------
Total unrealized gains (losses) on available
for sale investment securities 17,037 (6,032) 11,005
Net gains (losses) on derivatives
hedging variability of cash flows:
Arising during the period (6,182) 2,163 (4,019)
Reclassification adjustments for
hedging activities included in net income (5,948) 2,082 (3,866)
------------- ------------ ------------
Total net gains (losses) on derivatives
hedging variability of cash flows (12,130) 4,245 (7,885)
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 2,768
------------
Total comprehensive income $ 219,530
============
05/09/2007
7
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
March 31, 2007 & 2006 (Unaudited)
Three Months Ended March 31, 2006
------------------------------------------
Before-Tax Tax (Expense) Net-of-Tax
Amount Benefit Amount
-------------- ------------- -------------
Net income $ 173,072
Other comprehensive income:
Unrealized gains (losses) on available
for sale investment securities:
Arising during the period $ (15,924) $ 5,596 (10,328)
Reclassification for securities
transactions included in net income (448) 157 (291)
------------- ------------ ------------
Total unrealized gains (losses) on available
for sale investment securities (16,372) 5,753 (10,619)
Net gains (losses) on derivatives
hedging variability of cash flows:
Arising during the period 46,372 (16,230) 30,142
Reclassification adjustments for
hedging activities included in net income (2,702) 945 (1,757)
------------- ------------ ------------
Total net gains (losses) on derivatives hedging
variability of cash flows 43,670 (15,285) 28,385
------------
Other comprehensive income 17,766
------------
Total comprehensive income $ 190,838
============
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 March 31, 2007
---------------------------------------
Income Average Shares Per Share
(Numerator) (Denominator) Amount
------------ --------------- ----------
Basic Earnings Per Share:
Income Available to Common Shareholders $ 216,762 255,493 $ 0.85
=========
Effect of Dilutive Securities:
Stock Options, Restricted Stock
and Other Plans - 5,837
----------- --------------
Diluted Earnings Per Share:
Income Available to Common Shareholders $ 216,762 261,330 $ 0.83
=========
Three Months Ended March 31, 2006
---------------------------------------
Income Average Shares Per Share
(Numerator) (Denominator) Amount
------------ --------------- ----------
Basic Earnings Per Share:
Income Available to Common Shareholders $ 173,072 235,317 $ 0.74
=========
Effect of Dilutive Securities:
Stock Options, Restricted Stock
and Other Plans - 5,026
----------- --------------
Diluted Earnings Per Share:
Income Available to Common Shareholders $ 173,072 240,343 $ 0.72
=========
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 March 31,
---------------------------------------
2007 2006
------------------ -------------------
Shares 3,637 118
Price Range $ 47.58 - $ 48.90 $ 43.31 - $ 47.02
05/09/2007
8
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
March 31, 2007 & 2006 (Unaudited)
7. Business Combinations
The following acquisition, which is not considered to be a material
business combination, was completed during the first quarter of
2007:
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, along with 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.
Recently completed acquisitions
-------------------------------
On April 20, 2007, the Corporation completed the acquisition of
North Star Financial Corporation ("North Star") of Chicago,
Illinois. Total consideration in this transaction amounted to $21.0
million, consisting of 441,580 shares of M&I 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 will be 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, 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 M&I 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 will become M&I Marshall & Ilsley Bank ("M&I Bank")
branches.
Recent acquisition activity
---------------------------
On April 30, 2007, the Corporation and Excel Bank Corporation
("Excel") amended and restated its merger agreement dated February
9, 2007 to provide that Excel shareholders will receive $13.97 in
cash for each share of Excel common stock. Outstanding options to
acquire Excel common stock will be converted into options to acquire
shares of the Corporation's common stock. Excel, with $615 million
in consolidated assets as of December 31, 2006, has four branches in
the greater Minneapolis/St. Paul, Minnesota metropolitan area. The
transaction is expected to close in the third quarter of 2007.
05/09/2007
9
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
March 31, 2007 & 2006 (Unaudited)
8.
Investment Securities
Selected investment securities, by type, held by the Corporation
were as follows ($000's):
March 31, December 31, March 31,
2007 2006 2006
--------------- --------------- ---------------
Investment securities available for sale:
U.S. treasury and government agencies $ 5,558,054 $ 5,466,369 $ 4,708,218
States and political subdivisions 838,393 824,015 719,194
Mortgage backed securities 107,362 114,467 110,252
Other 575,844 573,002 501,981
-------------- -------------- --------------
Total $ 7,079,653 $ 6,977,853 $ 6,039,645
============== ============== ==============
Investment securities held to maturity:
States and political subdivisions $ 448,368 $ 494,020 $ 585,090
Other 1,500 1,500 2,000
-------------- -------------- --------------
Total $ 449,868 $ 495,520 $ 587,090
============== ============== ==============
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 March 31, 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 $ 255,555 $ 500 $ 3,073,457 $ 54,711 $ 3,329,012 $ 55,211
States and
political subdivisions 142,622 1,138 68,335 1,021 210,957 2,159
Mortgage backed securities 375 3 76,049 1,405 76,424 1,408
Other 1,592 8 400 64 1,992 72
------------ ---------- ----------- ---------- ----------- ------------
Total $ 400,144 $ 1,649 $ 3,218,241 $ 57,201 $ 3,618,385 $ 58,850
============ ========== =========== ========== =========== ============
The investment securities in the above table were temporarily
impaired at March 31, 2007. This temporary impairment represents
the amount of loss that would have been realized if the investment
securities had been sold on March 31, 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 December 31, 2006, total
unrealized losses on investment securities that had been in a
continuous loss position for less than twelve months amounted to
$2,079 and total unrealized losses on investment securities that had
been in a continuous loss position for more than twelve months
amounted to $72,284. At March 31,2007, the Corporation had the
ability and intent to hold these temporarily impaired investment
securities until a recovery of fair value, which may be maturity.
05/09/2007
10
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
March 31, 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):
March 31, December 31, March 31,
2007 2006 2006
--------------- --------------- ---------------
Commercial, financial and agricultural $ 12,305,995 $ 12,050,963 $ 10,244,761
Cash flow hedging instruments at fair value (2,228) (2,773) (4,141)
-------------- -------------- --------------
Commercial, financial and agricultural 12,303,767 12,048,190 10,240,620
Real estate:
Construction 6,293,881 6,088,206 4,054,364
Residential mortgage 6,501,063 6,328,478 5,370,353
Home equity loans and lines of credit 4,213,109 4,342,362 4,606,136
Commercial mortgage 10,904,417 10,965,607 8,819,281
-------------- -------------- --------------
Total real estate 27,912,470 27,724,653 22,850,134
Personal 1,352,334 1,458,594 1,518,828
Lease financing 686,070 703,580 626,228
-------------- -------------- --------------
Total loans and leases $ 42,254,641 $ 41,935,017 $ 35,235,810
============== ============== ==============
10. Financial Asset Sales
During the first quarter of 2007, the Corporation sold automobile
loans with principal balances of $116.6 million in securitization
transactions. The Corporation recognized net losses of $0.2 million
from the sale and securitization of auto loans for the three months
ended March 31, 2007. Other income associated with auto
securitizations, primarily servicing income, amounted to $1.8
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) 22.6
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 March 31, 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 $ 936,260 $ 122,912 $ 1,059,172
Principal amounts of loans
60 days or more past due 2,672 368 3,040
Net credit losses year to date 2,088 130 2,218
11. Goodwill and Other Intangibles
The changes in the carrying amount of goodwill for the three months
ended March 31, 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 - 34,125 - 34,125
Purchase accounting adjustments (2,971) 10,030 231 7,290
------------ ------------ ------------ ------------
Goodwill balance as of March 31, 2007 $ 1,422,226 $ 1,374,431 $ 29,287 $ 2,825,944
============ ============ ============ ============
05/09/2007
11
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
March 31, 2007 & 2006 (Unaudited)
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. 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 2006 acquisition of Gold Banc
Corporation, Inc.
At March 31, 2007, the Corporation's other intangible assets
consisted of the following ($000's):
March 31, 2007
-----------------------------------------------
Accum-
Gross ulated Net
Carrying Amort- Carrying
Amount ization Value
--------------- --------------- ---------------
Other intangible assets
Core deposit intangible $ 207,805 $ 100,043 $ 107,762
Data processing contract
rights/customer lists 362,692 65,087 297,605
Trust customers 6,750 2,102 4,648
Tradename 8,000 1,067 6,933
Other Intangibles 1,250 759 491
-------------- -------------- --------------
$ 586,497 $ 169,058 $ 417,439
============== ============== ==============
Mortgage loan servicing rights $ 2,088
==============
Amortization expense of other acquired intangible assets for the
three months ended March 31, 2007 and 2006 amounted to $11.0 million
and $8.5 million, respectively. Amortization of mortgage servicing
rights amounted to $0.3 million and $0.4 million for the three
months ended March 31, 2007 and 2006, respectively.
The estimated amortization expense of other intangible assets and
mortgage loan servicing rights for the next five annual fiscal years
are ($000's):
2008 $ 45,256
2009 41,932
2010 39,390
2011 37,488
2012 35,894
12. Deposits
The Corporation's deposit liabilities consisted of the following
($000's):
March 31, December 31, March 31,
2007 2006 2006
--------------- --------------- ---------------
Noninterest bearing demand $ 5,391,832 $ 6,112,362 $ 4,999,788
Savings and NOW 12,527,061 12,081,260 10,265,749
CD's $100,000 and over 7,259,797 7,841,499 7,018,466
Cash flow hedge-Institutional CDs 3,638 (970) (17,653)
-------------- -------------- --------------
Total CD's $100,000 and over 7,263,435 7,840,529 7,000,813
Other time deposits 4,807,479 4,821,233 3,602,642
Foreign deposits 2,645,493 3,228,998 2,229,992
-------------- -------------- --------------
Total deposits $ 32,635,300 $ 34,084,382 $ 28,098,984
============== ============== ==============
05/09/2007
12
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
March 31, 2007 & 2006 (Unaudited)
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.
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
three months ended March 31, 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 March 31, 2007, free standing interest rate swaps consisted of
$2.6 billion in notional amount of receive fixed / pay floating with
an aggregate negative fair value of $3.5 million and $1.7 billion in
notional amount of pay fixed / receive floating with an aggregate
positive fair value of $5.8 million.
At March 31, 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 March 31, 2007, the notional value of interest rate futures
designated as trading was $3.3 billion with a positive fair value of
$0.1 million.
05/09/2007
13
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
March 31, 2007 & 2006 (Unaudited)
The following table presents additional information with respect to
fair value hedges.
Fair Value Hedges
March 31, 2007 Weighted
Notional Fair Average
Hedged Hedging Amount Value Remaining
Item Instrument ($ in mil)($ in mil) Term (Yrs)
---------------------- ------------------- --------- --------- ----------
Fair Value Hedges that Qualify for Shortcut Accounting
------------------------------------------------------
Fixed Rate
Bank Notes Receive Fixed Swap $ 390.9 $ (11.6) 8.1
Other Fair Value Hedges
-----------------------
Fixed Rate
Bank Notes Receive Fixed Swap $ 125.0 $ (3.9) 9.3
Institutional CDs Receive Fixed Swap 50.0 0.2 29.2
Callable CDs Receive Fixed Swap 9.9 (0.0) 7.7
The impact from fair value hedges to total net interest income for
the three months ended March 31, 2007 was a negative $0.9 million.
The impact to net interest income due to ineffectiveness was not
material.
The following table summarizes the Corporation's cash flow hedges.
Cash Flow Hedges
March 31, 2007 Weighted
Notional Fair Average
Hedged Hedging Amount Value Remaining
Item Instrument ($ in mil)($ in mil) Term (Yrs)
---------------------- ------------------- --------- --------- ----------
Cash Flow Hedges that Qualify for Shortcut Accounting
-----------------------------------------------------
Floating Rate
Bank Notes Pay Fixed Swap $ 125.0 $ 0.1 0.1
Other Cash Flow Hedges
----------------------
Variable Rate Loans Receive Fixed Swap $ 100.0 $ (2.2) 1.3
Institutional CDs Pay Fixed Swap 1,725.0 (3.6) 1.5
Federal Funds
Purchased Pay Fixed Swap 150.0 (0.0) 0.7
FHLB Advances Pay Fixed Swap 1,410.0 0.1 3.9
Floating Rate
Bank Notes Pay Fixed Swap 550.0 (4.4) 2.7
The impact to total net interest income from cash flow hedges,
including amortization of terminated cash flow hedges for the three
months ended March 31, 2007 was a positive $5.9 million. For the
three months ended March 31, 2007, the impact due to ineffectiveness
was not material.
For the three months ended March 31, 2006, the total effect on net
interest income resulting from derivative financial instruments was
a positive $4.1 million, including the amortization of terminated
derivative financial instruments.
05/09/2007
14
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
March 31, 2007 & 2006 (Unaudited)
15. Postretirement Health Plan
The Corporation sponsors a defined benefit health plan that provides
health care benefits to eligible current and retired employees.
Eligibility for retiree benefits is dependent upon age, years of
service, and participation in the health plan during active service.
The plan is contributory and in 1997 and 2002 the plan was amended.
Employees hired 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 months ended
March 31, 2007 and 2006 included the following components ($000's):
Three Months Ended March 31,
-------------------------------
2007 2006
--------------- --------------
Service cost $ 434 $ 570
Interest cost on APBO 1,061 1,022
Expected return on plan assets (355) (232)
Prior service amortization (680) (680)
Actuarial loss amortization 121 379
-------------- -------------
Net periodic postretirement benefit cost $ 581 $ 1,059
============== =============
Benefit payments and expenses, net of participant contributions, for
the three months ended March 31, 2007 amounted to $1.1 million.
The funded status, which is the accumulated postretirement benefit
obligation net of fair value of plan assets, as of March 31, 2007 is
as follows ($000's):
Total funded status, December 31, 2006 $ (50,309)
Service cost (434)
Interest cost on APBO (1,061)
Expected return on plan assets 355
Employer contributions/payments 8,115
Expected subsidy (Medicare Part D) (192)
------------
Total funded status, March 31, 2007 $ (43,526)
============
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 months ended March 31, 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.
For the three months ended March 31, 2007, Metavante transaction
costs of $1.5 million and for the three months ended March 31, 2006,
Net derivative losses of $21.3 million are not included in segment
income, but are reported in Reclassifications and Eliminations in
the following tables. Management does not include these items when
assessing the financial results of the segment operations.
05/09/2007
15
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
March 31, 2007 & 2006 (Unaudited)
Fees - intercompany represent intercompany revenue charged to other
segments for providing certain services. Expenses - intercompany
represent fees charged by other segments for certain services
received. For each segment, Expenses - intercompany are not the
costs of that segment's reported intercompany revenues.
Intrasegment revenues, expenses and assets have been eliminated ($
in millions):
Three Months Ended March 31, 2007
---------------------------------------------------------------------------------
Reclass-
ifications
Corporate & Elimi- Consol-
Banking Metavante Others Overhead nations idated
------------ ------------ ------------ ------------ ----------- ------------
Net interest income $ 397.4 $ (7.3) $ 5.4 $ (8.3) $ 3.1 $ 390.3
Other income
------------
Fees - external 80.5 356.9 61.7 - - 499.1
Fees - internal
Fees - intercompany 18.1 27.3 1.7 28.5 (75.6) -
Float income - intercompany - 3.1 - - (3.1) -
---------- ----------- ----------- ----------- ---------- -----------
Total other income 98.6 387.3 63.4 28.5 (78.7) 499.1
Gains related to Firstsource - 8.0 - - - 8.0
Other expense
-------------
Expenses - other 191.0 297.5 37.2 26.1 1.2 553.0
Expenses - intercompany 46.3 13.5 13.9 1.6 (75.3) -
---------- ----------- ----------- ----------- ---------- -----------
Total other expense 237.3 311.0 51.1 27.7 (74.1) 553.0
Provision for loan
and lease losses 16.8 - 0.3 - - 17.1
---------- ----------- ----------- ----------- ---------- -----------
Income (loss) before taxes 241.9 77.0 17.4 (7.5) (1.5) 327.3
Income tax expense (benefit) 79.4 27.7 6.4 (2.8) (0.2) 110.5
---------- ----------- ----------- ----------- ---------- -----------
Segment income (loss) $ 162.5 $ 49.3 $ 11.0 $ (4.7) $ (1.3) $ 216.8
========== =========== =========== =========== ========== ===========
Identifiable assets $ 53,617.1 $ 3,059.8 $ 822.8 $ 1,008.7 $ (1,977.0) $ 56,531.4
========== =========== =========== =========== ========== ===========
Return on average equity 12.5% 15.5% 18.0% 14.1%
========== =========== =========== ===========
Three Months Ended March 31, 2006
---------------------------------------------------------------------------------
Reclass-
ifications
Corporate & Elimi- Consol-
Banking Metavante Others Overhead nations idated
------------ ------------ ------------ ------------ ----------- ------------
Net interest income $ 330.7 $ (8.3) $ 3.6 $ (4.1) $ 3.2 $ 325.1
Other income
------------
Fees - external 73.7 343.0 53.4 2.1 (21.3) 450.9
Fees - internal
Fees - intercompany 16.1 24.8 1.5 25.0 (67.4) -
Float income - intercompany - 3.2 - - (3.2) -
---------- ----------- ----------- ----------- ---------- -----------
Total other income 89.8 371.0 54.9 27.1 (91.9) 450.9
Other expense
-------------
Expenses - other 163.7 296.0 34.3 12.2 (1.1) 505.1
Expenses - intercompany 40.4 12.6 11.1 2.2 (66.3) -
---------- ----------- ----------- ----------- ---------- -----------
Total other expense 204.1 308.6 45.4 14.4 (67.4) 505.1
Provision for loan
and lease losses 10.5 - 0.5 - - 11.0
---------- ----------- ----------- ----------- ---------- -----------
Income (loss) before taxes 205.9 54.1 12.6 8.6 (21.3) 259.9
Income tax expense (benefit) 67.8 19.6 4.6 2.4 (7.6) 86.8
---------- ----------- ----------- ----------- ---------- -----------
Segment income (loss) $ 138.1 $ 34.5 $ 8.0 $ 6.2 $ (13.7) $ 173.1
========== =========== =========== =========== ========== ===========
Identifiable assets $ 44,666.9 $ 2,797.5 $ 687.7 $ 766.6 $ (1,554.1) $ 47,364.6
========== =========== =========== =========== ========== ===========
Return on average equity 14.5% 13.0% 16.0% 14.6%
========== =========== =========== ===========
05/09/2007
16
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
March 31, 2007 & 2006 (Unaudited)
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 March 31,
-------------------------------
2007 2006
--------------- --------------
Trust Services $ 52.2 $ 46.0
Capital Markets 1.8 0.6
Brokerage and Insurance 9.2 7.3
Commercial Leasing 4.6 3.1
Others 1.0 1.5
-------------- -------------
Total $ 68.8 $ 58.5
============== =============
17. Subsequent Events
On April 3, 2007, the Corporation announced its plan to separate
Marshall & Ilsley Corporation and Metavante Corporation into two
separate publicly held companies.
Under an investment agreement with Warburg Pincus, a global private
equity investor, Warburg Pincus has agreed to invest $625 million to
acquire an equity stake of 25 percent in Metavante Corporation.
Marshall & Ilsley Corporation shareholders will own 75 percent of
the shares of Metavante Corporation. 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 Corporation debt will be arranged.
Upon completion of the transaction, shareholders will receive one
share of the new Marshall & Ilsley Corporation stock for each one
share of Marshall & Ilsley Corporation stock held and one share of
Metavante Corporation stock for every three shares of Marshall &
Ilsley Corporation stock held.
Marshall & Ilsley Corporation's board of directors has unanimously
approved the investment agreement and related transactions and has
recommended its approval by Marshall & Ilsley Corporation's
shareholders. 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 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, obtaining a favorable ruling from
the Internal Revenue Service, and other regulatory approvals.
On April 24, 2007, the Corporation announced that its Board of
Directors increased the quarterly cash dividend on the Corporation's
common stock 14.8 percent to $0.31 per common share from $0.27 per
common share.
On April 26, 2007, the Corporation announced that it had repurchased
3.25 million shares of its common stock or approximately 1.2 percent
of its outstanding common stock. The shares of common stock were
purchased through an accelerated share repurchase program at $48.03
per share for a total cost of approximately $156.1 million. Under
the accelerated share repurchase program agreement, after a period
not expected to exceed sixty days, the Corporation may receive or be
required to pay a price adjustment based on an adjusted weighted
average price as defined in the accelerated share repurchase program
agreement. Any price adjustment may be settled in cash or shares of
common stock at the Corporation's option. After the repurchase
approximately 8.75 million shares remain available under prior
repurchase authorizations by the Corporation's Board of Directors.
05/09/2007
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 March 31,
--------------------------------
2007 2006
--------------- ---------------
Assets
------
Cash and due from banks $ 1,041,797 $ 980,078
Investment securities:
----------------------
Trading securities 41,301 34,177
Short-term investments 277,218 315,719
Other investment securities:
Taxable 6,153,473 4,979,354
Tax-exempt 1,287,860 1,340,598
-------------- --------------
Total investment securities 7,759,852 6,669,848
Loans and leases:
-----------------
Loans and leases, net of unearned income 42,106,894 34,678,578
Allowance for loan and lease losses (423,702) (368,290)
-------------- --------------
Net loans and leases 41,683,192 34,310,288
Premises and equipment, net 574,409 495,887
Accrued interest and other assets 5,452,287 4,323,961
-------------- --------------
Total Assets $ 56,511,537 $ 46,780,062
============== ==============
Liabilities and Shareholders' Equity
------------------------------------
Deposits:
---------
Noninterest bearing $ 5,319,325 $ 4,942,011
Interest bearing 27,238,286 22,536,849
-------------- --------------
Total deposits 32,557,611 27,478,860
Federal funds purchased and security repurchase agreements 3,396,166 2,440,619
Other short-term borrowings 852,518 930,232
Long-term borrowings 11,623,710 9,404,002
Accrued expenses and other liabilities 1,823,058 1,712,169
-------------- --------------
Total liabilities 50,253,063 41,965,882
Shareholders' equity 6,258,474 4,814,180
-------------- --------------
Total Liabilities and Shareholders' Equity $ 56,511,537 $ 46,780,062
============== ==============
05/09/2007
18
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 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, obtaining a favorable ruling from the Internal Revenue
Service and other regulatory approvals.
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 has
demonstrated solid fundamental performance in each of these key areas
and as a result, the first quarter of 2007 produced strong financial
results.
Net income for the first quarter of 2007 amounted to $216.8 million
compared to $173.1 million for the same period in the prior year, an
increase of $43.7 million, or 25.2%. Diluted earnings per share were
$0.83 for the three months ended March 31, 2007 compared to $0.72 for
the three months ended March 31, 2006. The return on average assets and
average equity was 1.56% and 14.05%, respectively, for the quarter ended
March 31, 2007, and 1.50% and 14.58%, respectively, for the quarter
ended March 31, 2006.
For the three months ended March 31, 2007, costs associated with the
previously discussed Metavante transaction amounted to $1.5 million and
are included in a separate line within Other expense in the Consolidated
Statements of Income. Net income and diluted earnings per share for the
three months ended March 31, 2007, excluding the transaction costs,
would have been $218.1 million and $0.83 per share, respectively, and
the return on average assets and return on average equity would have
been 1.56% and 14.13%, respectively. The Corporation expects that
transaction related costs will significantly increase in future quarters
until the transaction is completed.
For the three months ended March 31, 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 $13.7 million and a decrease to diluted earnings per
share of $0.06 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 March
31, 2006, net income and diluted earnings per share would have been
$186.8 million and $0.78 per share respectively, and the return on
average assets and return on average equity would have been 1.62% and
15.67%, respectively.
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 months ended March 31, 2007 compared to
the three months ended March 31, 2006 was attributable to a number of
factors. The increase in net interest income was due to organic loan
and bank issued deposit growth and the contribution from the two banking
acquisitions that were completed on April 1, 2006. Net charge-offs as a
percent of average consolidated loans and leases were slightly below the
Corporation's five-year historical average despite the increase in
nonperforming loans and leases. 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 growth in assets under management and assets
under administration resulted in solid growth in fee income for Wealth
Management. These factors along with continued organic expense
management resulted in the reported earnings growth in the three months
ended March 31, 2007 compared to the three months ended March 31, 2006.
05/09/2007
19
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 will be filed with
the Securities and Exchange Commission which will provide, among other
things, financial information including pro forma financial information
for both Metavante and the Corporation.
RECENTLY COMPLETED ACQUISITIONS
-------------------------------
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.
On April 1, 2007, the Corporation completed its acquisition of United
Heritage Bankshares of Florida, Inc. United Heritage Bank, with $791.3
million in assets as of March 31, 2007, has 13 branches in the
metropolitan Orlando area. The current United Heritage Bank branches
will become M&I Bank branches.
On April 20, 2007, the Corporation completed its acquisition of North
Star Financial Corporation ("North Star") of Chicago, Illinois. North
Star and its subsidiaries provide a variety of wealth management
services through personal and other trusts. North Star's businesses will
be integrated with M&I's Wealth Management unit.
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 months ended March 31, 2007 and 2006 consisted of the following:
First quarter 2007
------------------
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
$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. See
Note 3 - Equity Investment in Firstsource Solutions Limited in Notes to
Financial Statements for further discussion of this transaction. The
Corporation expects that additional gains from Firstsource equity
activities could be recognized in future periods.
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.
First quarter 2006
------------------
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 $13.7 million and a decrease to diluted earnings per share of $0.06
per share for the three months ended March 31, 2006.
05/09/2007
20
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 43.5% of the Corporation's source of revenues for the
three months ended March 31, 2007 compared to 41.9% for the three months
ended March 31, 2006.
Net interest income for the first quarter of 2007 amounted to $390.3
million compared to $325.1 million reported for the first quarter of
2006, an increase of $65.2 million or 20.0%. Both acquisition-related
and organic loan growth, as well as 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, tightening loan
spreads and a general shift in the bank issued deposit mix from lower
cost to higher cost deposit products.
Average earning assets in the first quarter of 2007 amounted to $49.9
billion compared to $41.3 billion in the first quarter of 2006, an
increase of $8.6 billion or 20.6%. Average loans and leases accounted
for $7.4 billion of the growth in average earning assets in the first
quarter of 2007 compared to the first quarter of 2006. Average
investment securities increased $1.1 billion in the first quarter of
2007 over the prior year first quarter. The growth in average
investment securities was primarily due to the banking acquisitions.
Average interest bearing liabilities amounted to $43.1 billion in the
first quarter of 2007 compared to $35.3 billion in the first quarter of
2006, an increase of $7.8 billion or 22.1%. Average interest bearing
deposits increased $4.7 billion or 20.9% in the first quarter of 2007
compared to the first quarter of 2006. Average total borrowings,
primarily long-term borrowings, increased $3.1 billion or 24.2% in the
first quarter of 2007 compared to the same period in 2006.
Average noninterest bearing deposits increased $0.4 billion or 7.6% in
the three months ended March 31, 2007 compared to the three months ended
March 31, 2006.
The growth and composition of the Corporation's quarterly average loan
and lease portfolio for the current quarter and previous four quarters
are reflected in the following table ($ in millions):
Consolidated Average Loans and Leases
-------------------------------------
2007 2006 Growth Pct.
---------- --------------------------------------- ------------------
First Fourth Third Second First Prior
Quarter Quarter Quarter Quarter Quarter Annual Quarter
---------- --------- --------- --------- --------- -------- ---------
Commercial Loans and Leases
---------------------------
Commercial $ 12,164 $ 11,800 $ 11,559 $ 11,441 $ 9,877 23.2 % 3.1 %
Commercial real estate
Commercial mortgages 10,936 10,932 10,838 10,746 8,839 23.7 0.0
Construction 3,480 3,346 3,227 2,834 1,742 99.8 4.0
-------- -------- -------- -------- -------- ------ ------
Total commercial real estate 14,416 14,278 14,065 13,580 10,581 36.3 1.0
Commercial lease financing 513 538 529 504 493 4.0 (4.6)
-------- -------- -------- -------- -------- ------ ------
Total commercial
loans and leases 27,093 26,616 26,153 25,525 20,951 29.3 1.8
Personal loans and leases
-------------------------
Residential real estate
Residential mortgages 6,382 6,195 5,924 5,621 5,190 23.0 3.0
Construction 2,780 2,649 2,471 2,365 2,085 33.3 4.9
-------- -------- -------- -------- -------- ------ ------
Total residential real estate 9,162 8,844 8,395 7,986 7,275 25.9 3.6
Personal loans
Student 113 78 47 51 99 14.2 45.3
Credit card 245 250 246 237 227 7.9 (1.8)
Home equity loans and lines 4,295 4,387 4,474 4,596 4,706 (8.7) (2.1)
Other 1,031 1,101 1,143 1,167 1,289 (20.0) (6.4)
-------- -------- -------- -------- -------- ------ ------
Total personal loans 5,684 5,816 5,910 6,051 6,321 (10.1) (2.3)
Personal lease financing 168 162 150 136 132 26.8 3.5
-------- -------- -------- -------- -------- ------ ------
Total personal loans and leases 15,014 14,822 14,455 14,173 13,728 9.4 1.3
-------- -------- -------- -------- -------- ------ ------
Total consolidated average
loans and leases $ 42,107 $ 41,438 $ 40,608 $ 39,698 $ 34,679 21.4 % 1.6 %
======== ======== ======== ======== ======== ======= =======
05/09/2007
21
Total consolidated average loans and leases increased $7.4 billion or
21.4% in the first quarter of 2007 compared to the first quarter of
2006. Excluding the effect of the banking acquisitions, total
consolidated average loan and lease organic growth was 9.1% in the first
quarter of 2007 compared to the first quarter of 2006. Approximately
$3.9 billion of the growth in total consolidated average loans and
leases was attributable to the banking acquisitions and $3.5 billion of
the growth was organic. Of the $3.9 billion of average growth
attributable to the banking acquisitions, $2.8 billion was attributable
to average commercial real estate loans, $0.8 billion was attributable
to average commercial loans and leases and $0.3 billion was attributable
to average residential real estate loans. Of the $3.5 billion of
average loan and lease organic growth, $1.5 billion was attributable to
average commercial loans and leases, $1.0 billion was attributable to
average commercial real estate loans, and $1.6 billion was attributable
to residential real estate loans. From a production standpoint,
residential real estate loan closings in the first quarter of 2007 were
$1.1 billion compared to $1.2 billion in the fourth quarter of 2006 and
$1.2 billion in the first quarter of 2006. Average home equity loans
and lines declined $0.4 billion in the first quarter of 2007 compared to
the first quarter of 2006. Average personal loans and leases decreased
$0.2 billion in the first quarter of 2007 compared to the same period in
2006.
Total average commercial loan and lease organic growth continued to be
relatively strong in the first quarter of 2007 although the Corporation
has seen some slowing in certain businesses due to tightening inventory
management. 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 around 10% in 2007. 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 M&I's wholesale activity,
continue to be one of the Corporation's primary consumer loan products.
Average home equity loans and lines declined in the first quarter of
2007 compared to the first quarter 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 March 31, 2007 and
2006, real estate loans sold to investors amounted to $0.6 billion. At
March 31, 2007 and 2006, the Corporation had approximately $126.6
million and $120.7 million of mortgage loans held for sale,
respectively. Gains from the sale of mortgage loans amounted to $8.8
million in the first quarter of 2007 compared to $12.0 million in the
first quarter of 2006.
Auto loans securitized and sold in the first quarters of 2007 and 2006
amounted to $0.1 billion and $0.2 billion, respectively. Net gains and
losses from the sale and securitization of auto loans were not
significant in either the first quarter of 2007 or the first quarter of
2006. Auto loans held for sale amounted to $45.5 million and $38.4
million at March 31, 2007 and March 31, 2006, respectively.
The Corporation anticipates that it will continue to divest itself of
selected assets through sale or securitization in future periods.
05/09/2007
22
The growth and composition of the Corporation's quarterly average
deposits for the current and previous four quarters are as follows ($ in
millions):
Consolidated Average Deposits
-----------------------------
2007 2006 Growth Pct.
---------- --------------------------------------- ------------------
First Fourth Third Second First Prior
Quarter Quarter Quarter Quarter Quarter Annual Quarter
---------- --------- --------- --------- --------- -------- ---------
Bank issued deposits
--------------------
Noninterest bearing deposits
----------------------------
Commercial $ 3,769 $ 4,000 $ 3,948 $ 3,873 $ 3,473 8.5 % (5.8)%
Personal 964 951 953 998 943 2.3 1.4
Other 586 575 561 533 526 11.4 2.0
-------- -------- -------- -------- -------- ------ ------
Total noninterest
bearing deposits 5,319 5,526 5,462 5,404 4,942 7.6 (3.7)
Interest bearing deposits
Savings and NOW 2,951 2,961 3,081 3,251 2,831 4.2 (0.4)
Money market 8,260 8,128 7,795 7,389 6,599 25.2 1.6
Foreign activity 1,424 1,427 1,151 1,000 1,034 37.7 (0.3)
-------- -------- -------- -------- -------- ------ ------
Total interest
bearing deposits 12,635 12,516 12,027 11,640 10,464 20.7 0.9
Time deposits
-------------
Other CDs and time deposits 4,832 4,847 4,843 4,769 3,509 37.7 (0.3)
CDs greater than $100,000 3,401 3,264 3,137 2,878 2,035 67.1 4.2
-------- -------- -------- -------- -------- ------ ------
Total time deposits 8,233 8,111 7,980 7,647 5,544 48.5 1.5
-------- -------- -------- -------- -------- ------ ------
Total bank issued deposits 26,187 26,153 25,469 24,691 20,950 25.0 0.1
Wholesale deposits
------------------
Money market 938 835 795 737 893 5.1 12.3
Brokered CDs 4,332 5,257 5,510 5,382 3,874 11.8 (17.6)
Foreign time 1,101 892 1,147 1,931 1,762 (37.5) 23.4
-------- -------- -------- -------- -------- ------ ------
Total wholesale deposits 6,371 6,984 7,452 8,050 6,529 (2.4) (8.8)
-------- -------- -------- -------- -------- ------ ------
Total consolidated
average deposits $ 32,558 $ 33,137 $ 32,921 $ 32,741 $ 27,479 18.5 % (1.7)%
======== ======== ======== ======== ======== ======= =======
Average total bank issued deposits increased $5.2 billion or 25.0% in
the first quarter of 2007 compared to the first quarter of 2006.
Excluding the effect of the banking acquisitions, average total bank
issued deposit organic growth was 9.1% in the first quarter of 2007
compared to the first quarter of 2006. Approximately $3.1 billion of
the growth in average total bank issued deposits was attributable to the
banking acquisitions and $2.1 billion of the growth was organic. Of the
$3.1 billion of average growth attributable to the banking acquisitions,
$0.4 billion was attributable to average noninterest bearing deposits,
$1.0 billion was attributable to average interest bearing deposits and
$1.7 billion was attributable to average time deposits. Of the $2.1
billion of average bank issued deposit organic growth, $1.1 billion was
attributable to average interest bearing deposits and $1.0 billion was
attributable to average time deposits. Average noninterest bearing
deposits were relatively unchanged in the first quarter of 2007 compared
to the first quarter 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.
In the current interest environment, the Corporation has increasingly
been able to competitively price deposit products which has contributed
to the growth in average bank issued interest bearing deposits and
average bank issued time deposits. In addition, the recent interest
rate environment has resulted in a shift 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
although at a somewhat slower rate based on current interest rate
levels.
05/09/2007
23
Wholesale deposits are funds in the form of deposits generated through
distribution channels other than M&I's own banking branches. The
Corporation continues to make use of wholesale funding alternatives,
especially brokered and institutional certificates of deposit. These
deposits allow the Corporation's bank subsidiaries to gather funds
across a wider geographic base and at pricing levels considered
attractive, where the underlying depositor may be retail or
institutional. For the three months ended March 31, 2007, average
wholesale deposits decreased $0.2 billion, or 2.4% compared to the three
months ended March 31, 2006. Average wholesale deposits for the three
months ended March 31, 2007 include $0.6 billion of wholesale deposits
that were assumed in the 2006 banking acquisitions.
Total borrowings increased $1.5 billion to $16.0 billion at March 31,
2007, compared to $14.5 billion at December 31, 2006. 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 London Inter-Bank Offered Rate ("LIBOR") and mature at various
times from 2008 through 2013. In addition, a $0.3 billion fixed rate
borrowing with an interest rate of 5.15% and a maturity date of 2012 was
issued in the first quarter of 2007.
The Corporation's consolidated average interest earning assets and
interest bearing liabilities, interest earned and interest paid for the
three months ended March 31, 2007 and 2006, are presented in the
following tables ($ in millions):
Consolidated Yield and Cost Analysis
------------------------------------
Three Months Ended Three Months Ended
March 31, 2007 March 31, 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 $ 12,677.0 $ 238.1 7.62 % $ 10,369.9 $ 176.8 6.91 %
Commercial real estate loans 14,416.4 270.1 7.60 10,580.4 181.1 6.94
Residential real estate loans 9,161.7 165.4 7.32 7,275.3 122.8 6.85
Home equity loans and lines 4,295.0 79.9 7.55 4,705.9 81.0 6.98
Personal loans and leases 1,556.8 30.0 7.83 1,747.0 29.2 6.77
---------- ------- ------- ---------- ------- -------
Total loans and leases 42,106.9 783.5 7.55 34,678.5 590.9 6.91
Investment securities (b):
--------------------------
Taxable 6,153.5 77.1 5.03 4,979.4 57.9 4.64
Tax Exempt (a) 1,287.8 21.5 6.86 1,340.6 23.4 7.20
---------- ------- ------- ---------- ------- -------
Total investment securities 7,441.3 98.6 5.34 6,320.0 81.3 5.17
Trading securities (a) 41.3 0.2 1.38 34.2 0.1 0.87
Other short-term investments 277.2 3.8 5.57 315.7 3.5 4.58
---------- ------- ------- ---------- ------- -------
Total interest earning assets $ 49,866.7 $ 886.1 7.20 % $ 41,348.4 $ 675.8 6.62 %
========== ======= ======= ========== ======= =======
Interest bearing deposits:
--------------------------
Bank issued deposits:
---------------------
Bank issued interest
bearing activity deposits $ 12,634.4 $ 111.6 3.58 % $ 10,464.3 $ 74.7 2.89 %
Bank issued time deposits 8,232.9 98.3 4.84 5,544.3 53.3 3.90
---------- ------- ------- ---------- ------- -------
Total bank issued deposits 20,867.3 209.9 4.08 16,008.6 128.0 3.24
Wholesale deposits 6,371.0 80.1 5.10 6,528.2 70.8 4.40
---------- ------- ------- ---------- ------- -------
Total interest bearing deposits 27,238.3 290.0 4.32 22,536.8 198.8 3.58
Short-term borrowings 4,248.7 54.9 5.24 3,370.9 39.3 4.73
Long-term borrowings 11,623.7 143.8 5.02 9,404.0 104.7 4.51
---------- ------- ------- ---------- ------- -------
Total interest bearing liabilities $ 43,110.7 $ 488.7 4.60 % $ 35,311.7 $ 342.8 3.94 %
========== ======= ======= ========== ======= =======
Net interest margin (FTE) $ 397.4 3.23 % $ 333.0 3.26 %
======= ======= ======= =======
Net interest spread (FTE) 2.60 % 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 3 basis points from 3.26% in the
first quarter of 2006 to 3.23% in the first quarter of 2007. Compared
to the fourth quarter of 2006, the net interest margin FTE decreased 2
basis points from 3.25% in the fourth quarter of 2006 to 3.23% in the
first quarter of 2007.
05/09/2007
24
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, a flat
yield curve, loan growth that may exceed the Corporation's ability to
generate appropriately priced deposits 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
increasing nonperforming loans and leases, on the net interest margin
FTE for the remainder of 2007.
PROVISION FOR LOAN AND LEASE LOSSES AND CREDIT QUALITY
------------------------------------------------------
The following tables present comparative consolidated credit quality
information as of March 31, 2007 and the prior four quarters:
Nonperforming Assets
--------------------
($000's)
2007 2006
----------- -----------------------------------------------
First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter
----------- ----------- ----------- ----------- -----------
Nonaccrual $ 340,684 $ 264,890 $ 213,920 $ 193,028 $ 144,484
Renegotiated 117 125 130 133 138
Past due 90 days or more 10,858 2,991 5,132 4,855 4,523
---------- ---------- ---------- ---------- ----------
Total nonperforming loans and leases 351,659 268,006 219,182 198,016 149,145
Other real estate owned 26,580 25,452 15,152 11,701 8,207
---------- ---------- ---------- ---------- ----------
Total nonperforming assets $ 378,239 $ 293,458 $ 234,334 $ 209,717 $ 157,352
========== ========== ========== ========== ==========
Allowance for loan and lease losses $ 423,084 $ 420,610 $ 417,375 $ 415,201 $ 368,760
========== ========== ========== ========== ==========
Consolidated Statistics
-----------------------
2007 2006
----------- -----------------------------------------------
First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter
----------- ----------- ----------- ----------- -----------
Net charge-offs to average
loans and leases annualized 0.14 % 0.14 % 0.08 % 0.10 % 0.07 %
Total nonperforming loans and leases
to total loans and leases 0.83 0.64 0.53 0.49 0.42
Total nonperforming assets to total loans
and leases and other real estate owned 0.89 0.70 0.57 0.52 0.45
Allowance for loan and lease losses
to total loans and leases 1.00 1.00 1.01 1.03 1.05
Allowance for loan and lease losses
to total nonperforming loans and leases 120 157 190 210 247
05/09/2007
25
Nonaccrual Loans and Leases By Type
-----------------------------------
($000's)
2007 2006
----------- -----------------------------------------------
First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter
----------- ----------- ----------- ----------- -----------
Commercial
----------
Commercial, financial and agricultural $ 60,331 $ 50,855 $ 56,541 $ 59,558 $ 50,103
Lease financing receivables 1,510 1,119 539 454 1,399
---------- ---------- ---------- ---------- ----------
Total commercial 61,841 51,974 57,080 60,012 51,502
Real estate
-----------
Construction and land development 129,061 71,298 47,265 32,602 3,276
Commercial mortgage 66,596 57,705 40,234 40,669 32,479
Residential mortgage 78,578 82,675 67,799 58,255 55,579
---------- ---------- ---------- ---------- ----------
Total real estate 274,235 211,678 155,298 131,526 91,334
Personal 4,608 1,238 1,542 1,490 1,648
---------- ---------- ---------- ---------- ----------
Total nonaccrual loans and leases $ 340,684 $ 264,890 $ 213,920 $ 193,028 $ 144,484
========== ========== ========== ========== ==========
Reconciliation of Allowance for Loan and Lease Losses
-----------------------------------------------------
($000's)
2007 2006
----------- -----------------------------------------------
First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter
----------- ----------- ----------- ----------- -----------
Beginning balance $ 420,610 $ 417,375 $ 415,201 $ 368,760 $ 363,769
Provision for loan and lease losses 17,148 18,253 10,250 11,053 10,995
Allowance of banks and loans acquired - - - 45,258 -
Loans and leases charged-off
----------------------------
Commercial 7,222 2,213 4,073 6,125 3,869
Real estate 6,616 11,483 4,971 3,385 2,901
Personal 4,290 4,216 3,516 3,088 3,727
Leases 173 256 165 1,253 189
---------- ---------- ---------- ---------- ----------
Total charge-offs 18,301 18,168 12,725 13,851 10,686
Recoveries on loans and leases
------------------------------
Commercial 1,712 1,097 2,251 847 2,715
Real estate 488 415 783 1,224 263
Personal 935 1,096 1,031 1,149 971
Leases 492 542 584 761 733
---------- ---------- ---------- ---------- ----------
Total recoveries 3,627 3,150 4,649 3,981 4,682
---------- ---------- ---------- ---------- ----------
Net loans and leases charged-off 14,674 15,018 8,076 9,870 6,004
---------- ---------- ---------- ---------- ----------
Ending balance $ 423,084 $ 420,610 $ 417,375 $ 415,201 $ 368,760
========== ========== ========== ========== ==========
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 $26.6 million at March 31, 2007, compared to $25.5 million at
December 31, 2006 and $8.2 million at March 31, 2006. Construction and
land development and residential real estate properties acquired in
partial or total satisfaction of problem loans accounted for 25.0% and
56.7% of OREO at March 31, 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.
05/09/2007
26
At March 31, 2007, nonperforming loans and leases amounted to $351.7
million or 0.83% of consolidated loans and leases compared to $268.0
million or 0.64% of consolidated loans and leases at December 31, 2006,
and $149.1 million or 0.42% of consolidated loans and leases at March
31, 2006. Nonaccrual loans and leases continue to be the primary source
of nonperforming loans and leases.
At March 31, 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 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.
Nonperforming loans and leases associated with banking acquisitions
amounted to $78.6 million or 1.96% of the acquired loans and leases and
22.3% of total consolidated nonperforming loans and leases at March 31,
2007.
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, 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 March 31,
2007 approximately $80.5 million or 22.9% of the Corporation's
nonperforming loans and leases were 60 days or less past due.
Net charge-offs amounted to $14.7 million or 0.14% of average loans and
leases in the first quarter of 2007 compared to $15.0 million or 0.14%
of average loans and leases in the fourth quarter of 2006 and $6.0
million or 0.07% of average loans and leases in the first quarter of
2006. The ratio of recoveries to charge-offs was 19.8% for the three
months ended March 31, 2007, compared to 17.3% in the fourth quarter of
2006, and 43.8% in the first quarter of 2006. The most recent five year
average ratio of recoveries to charge-offs was 30.4%.
The provisions for loan and lease losses amounted to $17.1 million for
the three months ended March 31, 2007, compared to $18.3 million for the
three months ended December 31, 2006 and $11.0 million for the three
months ended March 31, 2006. The allowance for loan and lease losses as
a percent of consolidated loans and leases outstanding was 1.00% at
March 31, 2007, 1.00% at December 31, 2006 and 1.05% at March 31, 2006.
As a result of these portfolio trends, management believes that in the
near term the expected level of nonperforming loans and leases will
increase from current levels. In addition to identifying new problem or
potential problem loans and leases, 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 relatively modest. 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 anticipated for the year ended December 31, 2007.
OTHER INCOME
------------
Other income or noninterest sources of revenue represented 56.5% and
58.1% of the Corporation's total sources of revenues for the three
months ended March 31, 2007 and 2006, respectively. Total other income
in the first quarter of 2007 amounted to $507.1 million compared to
$450.9 million in the same period last year, an increase of $56.2
million or 12.5%. As previously discussed, other income for the three
months ended March 31, 2007 included $8.0 million in gains related to
Firstsource and other income for the three months ended March 31, 2006
included $21.3 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.
05/09/2007
27
Data processing services external revenue (Metavante) amounted to $356.4
million in the first quarter of 2007 compared to $343.0 million in the
first quarter of 2006, an increase of $13.4 million or 3.9% . 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 a significant portion
of the revenue growth in the three months ended March 31, 2007, compared
to the three months ended March 31, 2006. Metavante estimates that
total revenue growth (internal and external) for the three months ended
March 31, 2007 compared to the three months ended March 31, 2006
excluding the acquisitions ("organic revenue growth"), was approximately
2.0%. 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. Total external buyout
revenue, which varies from period to period, amounted to $0.7 million
for the three months ended March 31, 2007 compared to $3.9 million for
the three months ended March 31, 2006, a decrease of $3.2 million.
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. Despite the lower organic growth rate
in the first quarter of 2007, management believes the growth rate will
increase in the third and fourth quarters of 2007 and expects annual
organic revenue growth in 2007 will be in the mid-single digits.
Wealth management revenue amounted to $60.7 million in the first quarter
of 2007 compared to $52.8 million in the first quarter of 2006, an
increase of $7.9 million or 15.0%. For the three months ended March 31,
2007, wealth management revenue attributable to the previously reported
April 1, 2006 acquisition of Gold Banc Corporation, Inc. amounted to
$1.0 million. 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 $22.9
billion at March 31, 2007, compared to $22.5 billion at December 31,
2006 and $19.8 billion at March 31, 2006.
Service charges on deposits amounted to $25.9 million in the first
quarter of 2007, an increase of $3.3 million or 14.8% from the first
quarter of 2006. The banking acquisitions contributed $2.0 million of
service charges on deposits for the three months ended March 31, 2007.
A portion of this source of fee income is sensitive to changes in
interest rates. Excluding the effect of the banking acquisitions,
increased service charges on deposits associated with commercial demand
deposits accounted for the majority of the increase in this revenue in
the three months ended March 31, 2007 compared to the three months ended
March 31, 2006, respectively.
Total mortgage banking revenue was $10.1 million in the first quarter of
2007 compared with $12.9 million in the first quarter of 2006, a
decrease of $2.8 million or 21.6%. For each of the three months ended
March 31, 2007 and 2006, the Corporation sold $0.6 billion of
residential mortgage and home equity loans to the secondary market.
As previously discussed, the Corporation continues to sell home equity
loans at origination which is partly in response to the demand for home
equity products with higher loan-to-value characteristics.
Net investment securities gains amounted to $1.6 million (primarily
Capital Markets related) in the first quarter of 2007 compared to $1.1
million in the first quarter of 2006, an increase of $0.5 million or
40.2%. As previously discussed, gains related to Firstsource for the
three months ended March 31, 2007, amounted to $8.0 million.
As previously discussed, Net derivative losses-discontinued hedges that
amounted to $21.3 million for the three months ended March 31, 2006
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.
Other income in the first quarter of 2007 amounted to $36.9 million
compared to $32.9 million in the first quarter of 2006, an increase of
$4.0 million or 12.4%. Other income for the three months ended March
31, 2007 included $1.2 million of income attributable to the banking
acquisitions.
05/09/2007
28
OTHER EXPENSE
-------------
Total other expense for the three months ended March 31, 2007 amounted
to $553.0 million compared to $505.1 million for the three months ended
March 31, 2006, an increase of $47.9 million or 9.5%.
Total other expense for the three months ended March 31, 2007 includes
the operating expenses associated with Metavante's 2007 and 2006
acquisitions, and the 2006 banking 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 $26.8
million of the operating expense growth in the first quarter of 2007
compared to the first quarter of 2006 was attributable to the
acquisitions. Total other expense for the three months ended March 31,
2007 included transaction expenses of $1.5 million associated with the
plan to separate Marshall & Ilsley Corporation and Metavante into two
separate publicly traded companies and 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 March 31, 2007 compared to the three months ended March 31, 2006,
excluding the effects of the acquisitions, the Metavante transaction
costs and the loss due to the call of the 7.65% junior subordinated
deferrable interest debentures and the related M&I Capital Trust A 7.65%
trust preferred securities was approximately $10.1 million or 2.0%.
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 March 31, 2007 and prior four quarters were:
Efficiency Ratios
-----------------
Three Months Ended
-------------------------------------------------------------------------
March 31, December 31, September 30, June 30, March 31,
2007 2006 2006 2006 2006
-------------- -------------- -------------- -------------- -------------
Consolidated Corporation 61.0 % 62.2 % 62.6 % 62.9 % 62.8 %
Consolidated Corporation
Excluding Metavante 50.5 % 50.6 % 52.4 % 51.2 % 48.8 %
Salaries and employee benefits expense amounted to $297.1 million in the
first quarter of 2007 compared to $277.4 million in the first quarter of
2006, an increase of $19.7 million or 7.1% . Salaries and benefits
associated with the acquisitions previously discussed accounted for
approximately $14.0 million of the increase in Salaries and employee
benefits expense in the three months ended March 31, 2007 compared to
the three months ended March 31, 2006.
For the first quarter of 2007, occupancy and equipment expense amounted
to $59.3 million compared to $57.8 million in the first quarter of 2006,
an increase of $1.5 million or 2.6% . The acquisitions accounted for
approximately all of the increase in occupancy and equipment expense in
the three months ended March 31, 2007 compared to the three months ended
March 31, 2006.
Software expenses, processing charges, supplies and printing,
professional services and shipping and handling expenses totaled $97.9
million in the first quarter of 2007 compared to $85.9 million in the
first quarter of 2006, an increase of $12.0 million or 13.9% . The
acquisitions accounted for $1.9 million of the expense growth for the
three months ended March 31, 2007 compared to the three months ended
March 31, 2006. Metavante's expense growth accounted for the majority
of the remaining increase in expense for these items in the three months
ended March 31, 2007 compared to the three months ended March 31, 2006.
Amortization of intangibles amounted to $11.3 million in the first
quarter of 2007 compared to $8.9 million in the first quarter of 2006,
an increase of $2.4 million. The increase in amortization associated
with the acquisitions amounted to $2.6 million for the three months
ended March 31, 2007 compared to the three months ended March 31, 2006.
Those increases were offset by lower amortization of core deposit
intangibles, which is based on a declining balance method from previous
acquisitions.
05/09/2007
29
As previously discussed, the Corporation incurred certain transaction
costs associated with the recently announced plan to separate Marshall &
Ilsley Corporation and Metavante into two separate publicly held
companies. For the three months ended March 31, 2007, these costs
amounted to $1.5 million and consisted of consulting and legal fees.
Other expense amounted to $85.9 million in the first quarter of 2007
compared to $75.1 million in the first quarter of 2006, an increase of
$10.8 million or 14.3%. The acquisitions accounted for $5.2 million of
the growth in other expense for the three months ended March 31, 2007
compared to the three months ended March 31, 2006. As previously
discussed, other expense for the three months ended March 31, 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.
Other expense is affected by the capitalization of costs, net of
amortization associated with software development and customer data
processing conversions. Net software and conversion activities was a
net credit of $0.2 million in the first quarter of 2007. Net software
and conversion activities resulted in $2.7 million of expense in the
first quarter of 2006. Net software and conversion activities resulted
in a decrease of $2.9 million in other expense in the first quarter of
2007 compared the first quarter of 2006.
INCOME TAXES
------------
The provision for income taxes for the three months ended March 31, 2007
amounted to $110.6 million or 33.8% of pre-tax income compared to $86.8
million or 33.4% of pre-tax income for the three months ended March 31,
2006.
RECONCILIATION OF NON-GAAP TO GAAP RESULTS
------------------------------------------
The Corporation has provided non-GAAP (Generally Accepted Accounting
Principles) operating results for the three months ended March 31, 2007
and 2006 as a supplement to its GAAP financial results. The Corporation
believes that these non-GAAP financial measures are useful because they
allow investors to assess, on a consistent basis, the Corporation's core
operating performance, exclusive of items management believes are not
reflective of the operations of the Corporation. Management uses such
non-GAAP financial measures to evaluate financial results and to
establish operational goals. These non-GAAP financial measures should be
considered a supplement to, and not as a substitute for, financial
measures prepared in accordance with GAAP.
Three Months Ended
-----------------------------------------------------------
March 31, 2007 March 31, 2006
---------------------------- ----------------------------
Per Per
Amount Diluted Amount Diluted
($ in millions) Share ($ in millions) Share
--------------- ----------- --------------- -----------
Net Income $ 216.8 $ 0.83 $ 173.1 $ 0.72
Metavante Transaction Costs, net of tax 1.3 - - -
Net Derivative Losses -
Discontinued Hedges, net of tax - - 13.7 0.06
-------------- --------- -------------- ---------
Net Income as Adjusted $ 218.1 $ 0.83 $ 186.8 $ 0.78
============== ========= ============== =========
Average Shareholders' Equity $ 4,814
Cumulative Net Derivative Losses -
Discontinued Hedges, net of tax 19
--------------
Adjusted Average Shareholders' Equity $ 4,833
==============
Based on Net Income as Adjusted:
Return on Assets 1.56 % 1.62 %
Return on Equity 14.13 15.67
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
Shareholders' equity was $6.35 billion or 11.2% of total consolidated
assets at March 31, 2007, compared to $6.15 billion or 10.9% of total
consolidated assets at December 31, 2006, and $4.86 billion or 10.3% of
total consolidated assets at March 31, 2006.
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 quarter of 2007 the Corporation issued 85,777 shares of its
common stock for $3.4 million to fund its first quarter 2007 obligation
under its employee stock purchase plan.
05/09/2007
30
At March 31, 2007, the net loss in accumulated other comprehensive
income amounted to $14.8 million, which represented a positive change in
accumulated other comprehensive income of $2.8 million since December
31, 2006. Net accumulated other comprehensive income associated with
available for sale investment securities was a net loss of $11.0 million
at March 31, 2007, compared to a net loss of $22.0 million at December
31, 2006, resulting in a net gain of $11.0 million over the three month
period. The net unrealized loss associated with the change in fair value
of the Corporation's derivative financial instruments designated as cash
flow hedges was $7.8 million for the three months ended March 31, 2007.
The change in the postretirement benefit obligation plan funded status
at March 31, 2007 compared to December 31, 2006, resulted in a net
unrealized loss of $0.4 million.
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. 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 or an average price
of $41.79 per common share.
On April 26, 2007, the Corporation announced that it had repurchased
3,250,000 shares of its common stock or approximately 1.2 percent of its
outstanding common stock. The shares of common stock were purchased
through an accelerated share repurchase program at $48.03 per common
share for a total cost of approximately $156.1 million. Under the
accelerated share repurchase program agreement, after a period not
expected to exceed sixty days, the Corporation may receive or be
required to pay a price adjustment based on an adjusted weighted average
price as defined in the accelerated share repurchase program agreement.
Any price adjustment may be settled in cash or shares of common stock at
the Corporation's option. After the repurchase approximately 8,750,000
shares remain available under prior repurchase authorizations by the
Corporation's Board of Directors.
On April 1 and April 20, 2007, the Corporation completed the
acquisitions of United Heritage Bankshares of Florida, Inc. and North
Star Financial Corporation, respectively. In conjunction with these
transactions the Corporation issued 4,852,227 shares of its common stock
valued at approximately $225.3 million and exchanged vested stock
options valued at approximately $15.3 million.
The Corporation continues to have a strong capital base and its
regulatory capital ratios are significantly above the minimum
requirements as shown in the following tables.
RISK-BASED CAPITAL RATIOS
-------------------------
($ in millions)
March 31, 2007 December 31, 2006
--------------------------------- ---------------------------------
Amount Ratio Amount Ratio
--------------------------------- ---------------------------------
Tier 1 Capital $ 3,842 7.77 % $ 3,873 7.88 %
Tier 1 Capital
Minimum Requirement 1,979 4.00 1,965 4.00
----------------- ------------- ----------------- -------------
Excess $ 1,863 3.77 % $ 1,908 3.88 %
================= ============= ================= =============
Total Capital $ 5,440 11.00 % $ 5,489 11.17 %
Total Capital
Minimum Requirement 3,957 8.00 3,930 8.00
----------------- ------------- ----------------- -------------
Excess $ 1,483 3.00 % $ 1,559 3.17 %
================= ============= ================= =============
Risk-Adjusted Assets $ 49,464 $ 49,128
================= =================
LEVERAGE RATIOS
---------------
($ in millions)
March 31, 2007 December 31, 2006
--------------------------------- ---------------------------------
Amount Ratio Amount Ratio
--------------------------------- ---------------------------------
Tier 1 Capital $ 3,842 7.18 % $ 3,873 7.38 %
Minimum Leverage
Requirement 1,605 - 2,674 3.00 - 5.00 1,575 - 2,625 3.00 - 5.00
----------------- ------------- ----------------- -------------
Excess $ 2,237 - 1,168 4.18 - 2.18 % $ 2,298 - 1,248 4.38 - 2.38 %
================= ============= ================= =============
Adjusted Average
Total Assets $ 53,480 $ 52,508
================= =================
M&I 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.
M&I maintains liquidity by obtaining funds from several sources.
05/09/2007
31
The Corporation's most readily available source of liquidity is its
investment portfolio. Investment securities available for sale, which
totaled $7.1 billion at March 31, 2007, represent a highly accessible
source of liquidity. The Corporation's portfolio of held-to-maturity
investment securities, which totaled $0.4 billion at March 31, 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 M&I's defined markets are another source of liquidity.
Core deposits (demand, savings, money market and consumer time deposits)
averaged $21.4 billion in the first 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 $6.4 billion in the first quarter of 2007.
The Corporation utilizes 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 first quarter of 2007.
The Corporation's lead bank, M&I Marshall & Ilsley Bank (the "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 March 31, 2007
amounted to $7.9 billion of which $1.3 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, depositary shares, purchase
contracts, units, warrants, and trust preferred securities, up to an
aggregate amount of $3.0 billion. At March 31, 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 March 31, 2007, there were 3.1
million shares of common stock available for future issuances.
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 March 31,
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 March 31, 2007, MiNotes
issued amounted to $0.2 billion in aggregate principal amount.
Additionally, the Corporation has a commercial paper program. At March
31, 2007, commercial paper outstanding amounted to $0.5 billion in
aggregate principal amount.
05/09/2007
32
Short-term borrowings represent contractual debt obligations with
maturities of one year or less and amounted to $3.9 billion at March 31,
2007. Long-term borrowings amounted to $12.1 billion at March 31, 2007.
The scheduled maturities of long-term borrowings including estimated
interest payments at March 31, 2007 were as follows: $5.3 billion is due
in less than one year; $3.3 billion is due in one to three years; $3.0
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 holds all of the common
interest in M&I Capital Trust A, which issued cumulative preferred
capital securities which are 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 $200.0 million 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 March 31, 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 first
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:
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 SFAS 114. A loan is impaired when, based on
current information and events, it is probable that a creditor will be
unable to collect all amounts due according to the contractual terms of
the loan agreement. 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.
05/09/2007
33
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 March 31, 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 March 31, 2007, allowances for loan and lease losses continue to be
carried for exposures to construction and land development loans,
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 first quarter of 2007, the Corporation's commitments to
Shared National Credits were approximately $3.7 billion with usage
averaging around 49%. Over time, many of the Corporation's largest
charge-offs have come from the Shared National Credit portfolio. At
March 31, 2007, Shared National Credit nonperforming loans amounted to
$2.0 million. 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 and Missouri. 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 March 31, 2007, the
level of nonperforming loans for this portfolio segment was higher than
the Corporation's average level of nonperforming loans.
At March 31, 2007, nonperforming loans and leases amounted to $351.7
million or 0.83% of consolidated loans and leases compared to $268.0
million or 0.64% of consolidated loans and leases at December 31, 2006,
and $149.1 million or 0.42% of consolidated loans and leases at March
31, 2006. Nonaccrual loans and leases continue to be the primary source
of nonperforming loans and leases.
Net charge-offs amounted to $14.7 million or 0.14% of average loans and
leases in the first quarter of 2007 compared to $15.0 million or 0.14%
of average loans and leases in the fourth quarter of 2006 and $6.0
million or 0.07% of average loans and leases in the first quarter of
2006. The ratio of recoveries to charge-offs was 19.8% for the three
months ended March 31, 2007 as compared with the five year average
ratio of recoveries to charge-offs of 30.4%.
05/09/2007
34
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 $423.1 million or 1.00% of loans and leases
outstanding at March 31, 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 $368.8 million or 1.05% of loans and leases outstanding at
March 31, 2006. Consistent with the credit quality trends noted above,
the provision for loan and lease losses amounted to $17.1 million for
the three months ended March 31, 2007. By comparison, the provision for
loan and lease losses amounted to $11.0 million for the three months
ended March 31, 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 March 31, 2007 and 2006, the amount of software
costs capitalized amounted to $14.0 million and $11.3 million,
respectively. Amortization expense of software costs amounted to $14.3
million for the three months ended March 31, 2007 compared to $14.1
million for the three months ended March 31, 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 March 31, 2007
and 2006, the amount of conversion costs capitalized amounted to $2.7
million and $2.4 million, respectively. Amortization expense of
conversion costs amounted to $2.2 million and $2.3 million for the three
months ended March 31, 2007 and the three months ended March 31, 2006,
respectively.
Net unamortized costs were ($ in millions):
March 31,
---------------------------
2007 2006
----------- -----------
Software $ 159.3 $ 152.6
Conversions 29.4 26.9
---------- ----------
Total $ 188.7 $ 179.5
========== ==========
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 utilizes 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.
05/09/2007
35
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 March 31, 2007, net gains 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 first quarter of 2007,
the Corporation determined that there was a decline in the value of the
retained interests that was other than temporary because actual credit
losses exceeded expected credit losses. The realized gains of $0.6
million were offset by impairment losses of $0.5 million for the three
months ended March 31, 2007.
The Corporation regularly sells automobile loans to an unconsolidated
multi-seller special purpose entity commercial paper conduit in
securitization transactions in which servicing responsibilities and
subordinated interests are retained. The outstanding balances of
automobile loans sold in these securitization transactions were $936.3
million at March 31, 2007. At March 31, 2007, the carrying amount of
retained interests amounted to $38.5 million.
The Corporation has interests in an unconsolidated bankruptcy remote
QSPE whose assets are debt securities that are classified as available
for sale and are highly rated. The QSPE's activities are limited to
issuing highly rated asset-backed commercial paper with maturities up to
180 days which is used to finance the purchase of the investment
securities. The Corporation provides liquidity back-up in the form of
Liquidity Purchase Agreements. In addition, the Corporation acts as
counterparty to interest rate swaps that enable the QSPE to hedge its
interest rate risk. Such swaps are designated as free-standing
derivative financial instruments in the Corporation's Consolidated
Balance Sheet.
At March 31, 2007, highly rated investment securities in the amount of
$345.8 million were outstanding in the QSPE to support the outstanding
commercial paper.
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.
05/09/2007
36
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.
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 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, 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 other than trading
activities. While market risk that arises from trading activities in
the form of foreign exchange and interest rate risk is immaterial to the
Corporation, market risk from other than trading activities in the form
of interest rate risk is measured and managed through a number of
methods.
Interest Rate Risk
------------------
The Corporation uses financial modeling techniques to identify potential
changes in income under a variety of possible interest rate scenarios.
Financial institutions, by their nature, bear interest rate and
liquidity risk as a necessary part of the business of managing financial
assets and liabilities. The Corporation has designed strategies to
limit these risks within prudent parameters and identify appropriate
risk / reward tradeoffs in the financial structure of the balance sheet.
05/09/2007
37
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.
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 Reported
Pro Forma --------------------------
March 31, December 31, September 30, September 30, June 30, March 31,
2007 2006 2006 2006 2006 2006
------------- ------------- ------------- ------------- ------------- ------------
Hypothetical Change in Interest Rate
------------------------------------
100 basis point gradual:
Rise in rates 0.0 % 0.5 % 0.7 % (3.2) % (0.3) % (0.2) %
Decline in rates (0.2) % (0.6) % (0.8) % 2.2 % 0.3 % 0.1 %
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 March 31, 2007, the fair value of
equity at risk for a gradual 100bp shift in rates changed less than
2.0%.
05/09/2007
38
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 March 31, 2007, the carrying value of total active capital
markets investments amounted to approximately $49.4 million.
As of March 31, 2007, M&I Wealth Management administered $97.4 billion
in assets and directly managed a portfolio of $22.9 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.
05/09/2007
39
PART II - OTHER INFORMATION
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
----------------- ------------- ----------- ------------------ -----------------
January 1 to
January 31, 2007 5,163 $ 46.28 -- 12,000,000
February 1 to
February 28, 2007 47,255 48.98 -- 12,000,000
March 1 to
March 31, 2007 2,546 47.29 -- 12,000,000
------------ ---------- ----------------
Total 54,964 $ 48.65 --
============ ========== ================
(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.
On February 1, 2007, the Corporation issued 1,246,105 shares of its
common stock to HPT, Inc. ("HPT") in exchange for the same number of
shares of its common stock owned by HPT (the "Exchange") pursuant to an
Exchange Agreement by and among the Corporation, HPT and the Henry
Predolin Revocable Trust (the "Stockholder"), the sole stockholder of
HPT. As a condition precedent to the Exchange, the Stockholder and
Marshall & Ilsley Trust Company N.A. ("M&I Trust") entered into an
investment agreement relating to the terms and conditions of an
engagement of M&I Trust to provide the Stockholder and the Henry J.
Predolin Foundation, Inc. with investment advisory services. With
respect to the issuance of its common stock pursuant to the Exchange,
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 5. OTHER INFORMATION
The Compensation and Human Resources Committee (the "Committee") of the
Corporation's Board of Directors approved, subject to approval by the
Corporation's shareholders, the amended and restated Marshall & Ilsley
Corporation Annual Incentive Compensation Plan (the "Plan") as of
February 15, 2007 and for subsequent years until terminated by the
Committee. At the Corporation's Annual Meeting of Shareholders held on
April 24, 2007, the Corporation's shareholders approved the Plan. The
description of the material terms of the Plan and the complete text of
the Plan, which were set forth in the Proxy Statement on Schedule 14A
for the Corporation's 2007 Annual Meeting, are incorporated herein by
reference.
05/09/2007
40
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 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.
05/09/2007
41
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
May 10, 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.
(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.
05/09/2007