UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended December 31, 2008
OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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Commission File No. 1-33488
MARSHALL & ILSLEY CORPORATION
(Exact name of registrant as specified in its charter)
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Wisconsin
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20-8995389
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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770 North Water Street
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Milwaukee, Wisconsin
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53202
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(Address of principal executive offices)
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(Zip Code)
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Registrants telephone number, including area code: (414) 765-7801
Securities registered pursuant to Section 12(b) of the Act:
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Title of Each Class:
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Name of Each Exchange
on Which Registered:
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Common Stock$1.00 par value
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New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the
registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
x
No
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Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act. Yes
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No
x
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 if
disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K.
¨
Indicate by check mark
whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of large accelerated filer, accelerated filer and smaller reporting
company in Rule 12b-2 of the Exchange Act.
(Check one): Large accelerated filer
x
Accelerated filer
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Non-accelerated filer
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Smaller
reporting company
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Indicate by check mark whether the registrant is
a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
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No
x
The aggregate market value of the voting stock held by nonaffiliates of the registrant as of June 30, 2008 was approximately $3,922,398,000. As of
January 31, 2009, the number of shares of Common Stock outstanding was 265,325,075, and the number of shares of Senior Preferred Stock, Series B outstanding was 1,715,000.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates information by reference
from the Proxy Statement for the registrants Annual Meeting of Shareholders to be held on April 28, 2009.
MARSHALL & ILSLEY CORPORATION
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2008
TABLE OF CONTENTS
i
PART I
General
Marshall & Ilsley Corporation (M&I or the Corporation), a Wisconsin corporation, is a registered bank holding company under the Bank Holding Company Act of 1956 (the BHCA) and is certified as
a financial holding company under the Gramm-Leach-Bliley Act. As of December 31, 2008, M&I had consolidated total assets of approximately $62.3 billion and consolidated total deposits of approximately $41.0 billion, making M&I the
largest bank holding company headquartered in Wisconsin. The executive offices of M&I are located at 770 North Water Street, Milwaukee, Wisconsin 53202 (telephone number (414) 765-7801). M&Is principal assets are the stock of its
bank and nonbank subsidiaries, which, as of February 15, 2009, consisted of five bank and trust subsidiaries and a number of companies engaged in businesses that the Board of Governors of the Federal Reserve System (the Federal
Reserve Board) has determined to be closely-related or incidental to the business of banking. M&I provides its subsidiaries with financial and managerial assistance in such areas as budgeting, tax planning, auditing, compliance assistance,
asset and liability management, investment administration and portfolio planning, business development, advertising and human resources management.
M&I provides diversified financial services to a wide variety of corporate, institutional, government and individual customers. M&Is largest
affiliates and principal operations are in Wisconsin; however, it has activities in other markets, particularly in certain neighboring Midwestern states, and in Arizona, Nevada and Florida. The Corporations principal activities consist of
banking and wealth management services.
M&I provides
banking services, which include lending to and accepting deposits from commercial and community banking customers, through its lead bank, M&I Marshall & Ilsley Bank (M&I Bank); Southwest Bank, an M&I Bank
(Southwest Bank), which is headquartered in St. Louis, Missouri; M&I Bank FSB, a federal savings bank subsidiary of M&I located in Las Vegas, Nevada; and an asset-based lending subsidiary headquartered in Minneapolis, Minnesota.
M&I provides these services through branch offices of M&Is subsidiary banks located throughout Wisconsin and Arizona, in western and central Florida, central Indiana, the metropolitan areas of Minneapolis, Minnesota, Kansas City,
Missouri and St. Louis, Missouri, and Duluth, Minnesota, Belleville, Illinois, and Las Vegas, Nevada, and through the Internet.
Wealth Management includes Marshall & Ilsley Trust Company National Association (M&I Trust Company), M&I Financial Advisors,
Inc. (M&I Financial Advisors), the private banking divisions of M&Is bank subsidiaries and other subsidiaries related to the wealth management business. Wealth Management services include trust services, brokerage and
insurance services, and investment management and advisory services, which are provided to residents of Wisconsin, Arizona, Minnesota, Missouri, Kansas, Florida, Nevada and Indiana.
Other financial services provided by M&I include personal property lease financing, wholesale lending, investment
services to institutional clients and venture capital.
Based
on the way M&I organizes its business, M&I has four reportable segments: Commercial Banking, Community Banking, Wealth Management and Treasury. Each of these segments is described in detail below. More information on M&Is business
segments is contained in Note 23 of the Notes to the Consolidated Financial Statements contained in Item 8, Consolidated Financial Statements and Supplementary Data.
Commercial Banking
M&Is Commercial Banking segment provides financial expertise in Corporate, Commercial, Correspondent and Commercial Real Estate Banking.
Commercial Banking provides a complete line of commercial, corporate and real estate banking products and services, including: traditional commercial loans and lines of credit, letters of credit, asset-based lending, equipment financing, mezzanine
financing, global trade services, treasury management and other financial services to middle market, large corporate and public sector clients. Commercial Banking also supports the commercial real estate and correspondent banking markets with
products and services including secured and unsecured lines of credit, letters of credit, construction loans for commercial and residential development and land acquisition and development loans.
1
Community Banking
M&Is Community Banking segment provides consumer and business banking products and services to customers primarily within the states in which
M&I offers banking services. Community Banking services are provided through branches located throughout Wisconsin and Arizona, in western and central Florida, central Indiana, the metropolitan areas of Minneapolis, Minnesota, Kansas City,
Missouri and St. Louis, Missouri, and Duluth, Minnesota, Belleville, Illinois, and Las Vegas, Nevada, and through the Internet. Consumer products include loan and deposit products such as mortgages, home equity loans and lines, credit cards, student
loans, personal lines of credit and term loans, demand deposit accounts, interest bearing transaction accounts and time deposits. Business banking products include secured and unsecured lines and term loans for working capital, inventory and general
corporate use, commercial real estate construction loans, agricultural loans, demand deposit accounts, interest bearing transaction accounts and time deposits.
Wealth Management
The Wealth Management segment, which includes M&Is trust, brokerage and private banking business, provides integrated asset management, trust
and banking services through three business lines: Investment Management, Personal Services and Institutional Services. Investment Management is a multi-dimensional asset management service with a broad range of strategies, styles and product
delivery options such as separately managed equity and fixed income strategies, managed asset allocation strategies, alternative investments and The Marshall Funds, M&Is family of mutual funds. Personal Services includes Cedar Street
Advisors, Personal Wealth Management and M&I Financial Advisors. Cedar Street Advisors manages the complex financial affairs of ultra-high net worth individuals and their families. Personal Wealth Management services assemble and implement an
all-inclusive financial roadmap for high net worth individuals and families, providing for their private banking (credit and deposits), investment, estate and tax planning needs. M&I Financial Advisors uses a formulized financial planning
process based on an individuals resources, goals, and risk tolerance to develop a personalized financial plan, and then offers a full array of brokerage and insurance solutions to meet that plan. The Institutional Services business includes
Retirement Plan Services, Taft-Hartley Services, Not-for-Profit Services, North Star Deferred Exchange and Trust Operations Outsourcing.
Treasury
Treasury provides management of interest rate risk, capital, liquidity, funding and investments to the Corporation and all of its subsidiary banks.
Others
The Other segment includes a Capital Markets Division and a National Consumer Banking Division. The Capital Markets Division
provides a variety of products and services designed to address its customers risk management and investment needs. These services include derivative solutions and investment services, currency conversion and foreign exchange services and risk
management. These services are provided primarily to corporate, business banking and financial institution clients. The National Consumer Banking Division provides wholesale home equity consumer lending, indirect automobile financing, and affinity
banking services.
Explanatory NoteSeparation of
Marshall & Ilsley Corporation and Metavante Corporation
Prior to November 1, 2007, Marshall & Ilsley Corporation consisted of two reportable business segments: Banking and Data Services (or Metavante). On November 1, 2007, Marshall & Ilsley Corporation separated the
Banking and Data Services businesses into two separate publicly-traded companies: new Marshall & Ilsley Corporation and Metavante Technologies, Inc. (formerly known as Metavante Corporation and referred to in this report as
Metavante). This event and the related transactions are referred to in this report as the Separation. The company known as Marshall & Ilsley Corporation prior to November 1, 2007 became a wholly-owned subsidiary
of new Marshall & Ilsley Corporation (the ultimate parent company of the Banking business) and was converted into a Wisconsin limited liability company named M&I LLC. Where applicable, the company formerly known as Marshall &
Ilsley Corporation and now known as M&I LLC is referred to in this report as Old M&I. Also on November 1, 2007,
2
the company that is now the ultimate parent company of the Banking business changed its name to Marshall & Ilsley Corporation. Where it is necessary
to distinguish this new entity from Marshall & Ilsley Corporation as a whole, the company that is now the ultimate parent company of the Banking business is referred to in this report as New M&I. In all other instances,
unless otherwise noted, the terms M&I or the Corporation refer to Marshall & Ilsley Corporation, the ultimate parent of the Banking business, since November 1, 2007, and to Old M&I prior to
November 1, 2007.
Additional information regarding the
Separation may be found in Note 2 of the Notes to Consolidated Financial Statements contained in Item 8, Consolidated Financial Statements and Supplementary Data.
Risk Management
Managing risk is an essential component of successfully operating a financial services company. M&I has an enterprise-wide approach to risk
governance, measurement, management and reporting risks inherent in its businesses. Risk management practices include key elements such as independent checks and balances, formal authority limits, policies and procedures and portfolio management.
M&Is internal audit department also evaluates risk management activities. These evaluations include performing internal audits and reporting the results to management and the Audit and Risk Management Committees, as appropriate.
M&I has established a number of management committees
responsible for assessing and evaluating risks associated with the Corporations businesses including the Credit Policy Committee, Asset Liability Committee and the Enterprise Risk Committee. M&I has in place a Risk Management Committee of
the Board of Directors for oversight and governance of its risk management function. The Risk Management Committee consists of three non-management directors and has the responsibility of overseeing managements actions with respect to credit,
market, liquidity, fiduciary, operational, compliance, legal and reputational risks as well as M&Is overall risk profile. M&Is Chief Risk Officer is responsible for reporting to the Risk Management Committee.
Operational Risk Management
Operational risk is the risk of loss from human errors, failed or inadequate
processes or systems and external events. This risk is inherent in all businesses. Resulting losses could take the form of explicit charges, increased operational costs, harm to M&Is reputation or lost opportunities.
M&I seeks to mitigate operational risk through a system of internal
controls to manage this risk at appropriate levels. Primary responsibility for managing internal controls lies with the managers of M&Is various business lines. M&I monitors and assesses the overall effectiveness of its system of
internal controls on an ongoing basis. The Enterprise Risk Committee oversees M&Is monitoring, management and measurement of operational risk. In addition, M&I has established several other executive management committees to monitor,
measure and report on specific operational risks to the Corporation, including business continuity planning, customer information security and compliance. These committees report to the Risk Management Committee of the Board of Directors on a
regular basis.
Corporate Governance Matters
M&I has adopted a Code of Business Conduct and Ethics that applies to
all of M&Is employees, officers and directors, including M&Is Chief Executive Officer, Chief Financial Officer and Controller. The Code of Business Conduct and Ethics is incorporated as an exhibit to this report and is also
available on M&Is website at www.micorp.com. M&I intends to disclose any amendment to or waiver of the Code of Business Conduct and Ethics that applies to M&Is Chief Executive Officer, Chief Financial Officer or Controller on
its website within five business days following the date of the amendment or waiver.
3
M&I makes available free of charge through its website its Annual Report on Form 10-K, Quarterly
Reports on Form 10-Q, Current Reports on Form 8-K and its insiders Section 16 reports, and all amendments to these reports, as soon as reasonably practicable after these materials are filed with or furnished to the Securities and Exchange
Commission. In addition, certain documents relating to corporate governance matters are available on M&Is website described above. These documents include, among others, the following:
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Charter for the Audit Committee of the Board of Directors;
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Charter for the Compensation and Human Resources Committee of the Board of Directors;
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Charter for the Nominating and Corporate Governance Committee of the Board of Directors;
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Categorical Standards for Lending, Banking and Other Business Relationships Involving M&Is Directors;
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Corporate Governance Guidelines; and
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Code of Business Conduct and Ethics.
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Shareholders also may obtain a copy of any of these documents free of charge by calling the M&I Shareholder Information Line at 1 (800) 642-2657.
Information contained on any of M&Is websites is not deemed to be a part of this Annual Report.
Acquisitions Announced or Completed in 2008
On January 2, 2008, the Corporation completed its acquisition of First Indiana Corporation (First Indiana) based in Indianapolis,
Indiana. First Indiana, with $2.1 billion in consolidated assets as of December 31, 2007, had 32 branches in central Indiana which became branches of M&I Bank on February 2, 2008.
On December 3, 2008, the Corporation completed its acquisition of a
majority equity interest in Taplin, Canida & Habacht, Inc. (TCH). TCH, a Miami, Florida-based institutional fixed income money manager, had approximately $7.3 billion of assets under management as of December 31, 2008. TCH
is part of the Corporations Wealth Management segment.
More information on M&Is acquisitions can be found in Note 5 of the Notes to the Consolidated Financial Statements contained in Item 8, Consolidated Financial Statements and Supplementary Data.
M&I continues to evaluate opportunities to acquire banking institutions
and other financial service providers and frequently conducts due diligence activities in connection with possible transactions. As a result, M&I may engage in discussions, and in some cases, negotiations with prospective targets and may make
future acquisitions for cash, equity or debt securities. The issuance of additional shares of M&I common stock would dilute a shareholders ownership interest in M&I. In addition, M&Is acquisitions may involve the payment of a
premium over book value, and therefore, some dilution of book value may occur with any future acquisition. Generally, it is M&Is policy not to comment on such discussions or possible acquisitions until a definitive agreement has been
signed. M&Is strategy for growth includes strengthening its presence in core markets, expanding into attractive markets and broadening its product offerings.
Principal Sources of Revenue
The table below shows the amount and percentages of M&Is total consolidated revenues resulting from interest and fees on loans and leases,
interest on investment securities, and Wealth Management revenues, for each of the last three years ($ in thousands):
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Interest and Fees on
Loans and Leases
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Interest on Investment
Securities
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Wealth Management
Revenues
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Years Ended December 31,
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Amount
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Percent of
Total
Revenues
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Amount
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Percent of
Total
Revenues
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Amount
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Percent of
Total
Revenues
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Total
Revenues
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2008
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$
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2,926,334
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72.7
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%
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$
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339,804
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8.4
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%
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$
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282,182
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7.0
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%
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$
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4,025,809
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2007
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3,243,109
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73.7
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371,074
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8.4
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262,835
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6.0
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4,398,231
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2006
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2,856,043
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74.5
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339,707
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8.9
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221,554
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5.8
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3,835,920
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4
M&I business segment information is contained in Note 23 of the Notes to the Consolidated Financial
Statements contained in Item 8, Consolidated Financial Statements and Supplementary Data.
Competition
M&I and
its subsidiaries face substantial competition from hundreds of competitors in the markets they serve, some of which are larger and have greater resources than M&I. M&Is bank subsidiaries compete for deposits and other sources of funds
and for credit relationships with other banks, savings associations, credit unions, finance companies, mutual funds, life insurance companies (and other long-term lenders) and other financial and non-financial companies located both within and
outside M&Is primary market areas, many of which offer products functionally equivalent to bank products. M&Is nonbank operations compete with numerous banks, finance companies, leasing companies, mortgage bankers, brokerage
firms, financial advisors, trust companies, mutual funds and investment bankers in Wisconsin and throughout the United States.
Employees
As of December 31, 2008, M&I and its subsidiaries employed in the aggregate 10,191 employees. M&I considers employee relations to be
excellent. None of the employees of M&I or its subsidiaries are represented by a collective bargaining group.
Supervision and Regulation
As registered bank holding companies, M&I and M&I LLC (referred to collectively in this section as M&I) are subject to regulation and examination by the Federal Reserve Board under the BHCA. As
of February 15, 2009, M&I owned a total of five bank and trust subsidiaries, including two Wisconsin state banks, a Missouri state bank, a federal savings bank, and a national banking association. M&Is two Wisconsin state bank
subsidiaries are subject to regulation and examination by the Wisconsin Department of Financial Institutions, as well as by the Federal Reserve Board. M&Is Missouri state bank subsidiary is subject to regulation and examination by the
Missouri Department of Economic Development, Division of Finance, and the Federal Reserve Board. M&Is federal savings bank subsidiary is subject to regulation and examination by the Office of Thrift Supervision. M&Is national
bank, through which trust operations are conducted, is subject to regulation and examination by the Office of the Comptroller of the Currency. In addition, all of M&Is bank subsidiaries are subject to examination by the Federal Deposit
Insurance Corporation (FDIC).
Under Federal
Reserve Board policy, M&I is expected to act as a source of financial strength to each of its bank subsidiaries and to commit resources to support each bank subsidiary in circumstances when it might not do so absent such requirements. In
addition, there are numerous federal and state laws and regulations which regulate the activities of M&I and its bank subsidiaries, including requirements and limitations relating to capital and reserve requirements, permissible investments and
lines of business, transactions with officers, directors and affiliates, loan limits, consumer protection laws, privacy of financial information, predatory lending, fair lending, mergers and acquisitions, issuances of securities, dividend payments,
inter-affiliate liabilities, extensions of credit and branch banking. Information regarding capital requirements for bank holding companies and tables reflecting M&Is regulatory capital position at December 31, 2008 can be found in
Note 15 of the Notes to the Consolidated Financial Statements contained in Item 8, Consolidated Financial Statements and Supplementary Data.
The federal regulatory agencies have broad power to take prompt corrective action if a depository institution fails to maintain certain capital levels. In
addition, a bank holding companys controlled insured depository institutions are liable for any loss incurred by the FDIC in connection with the default of, or any FDIC-assisted transaction involving, an affiliated insured bank or savings
association. Current federal law provides that adequately capitalized and managed bank holding companies from any state may acquire banks and bank holding companies located in any other state, subject to certain conditions. Banks are permitted to
create interstate branching networks in states that have not opted out of interstate branching. M&I Bank currently maintains interstate branches in Arizona, Florida, Indiana, Kansas, Minnesota and Missouri and Southwest Bank
maintains an interstate branch in Illinois.
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The laws and regulations to which M&I is subject are constantly under review by Congress, regulatory
agencies and state legislatures. In 1999, Congress enacted the Gramm-Leach-Bliley Act (the Act). Among other things, the Act repealed certain restrictions on affiliations between banks and securities firms. The Act also amended the BHCA
to permit bank holding companies that qualify as financial holding companies to engage in a broad list of financial activities, and any non-financial activity that the Federal Reserve Board, in consultation with the Secretary
of the Treasury, determines is complementary to a financial activity and poses no substantial risk to the safety and soundness of depository institutions or the financial system. The Act treats various lending, insurance underwriting,
insurance company, portfolio investment, financial advisory, securities underwriting, dealing and market-making, and merchant banking activities as financial in nature for this purpose.
Under the Act, a bank holding company may become certified as a financial holding company by filing a notice with the
Federal Reserve Board, together with a certification that the bank holding company meets certain criteria, including capital, management, and Community Reinvestment Act requirements. New M&I registered as a financial holding company on
November 1, 2007, immediately following the Separation.
The Federal Reserve Board has authority to prohibit bank holding companies from paying dividends if it deems such payment to be an unsafe or unsound practice. The Federal Reserve Board has indicated generally that it may be an unsafe or
unsound practice for bank holding companies to pay dividends unless the companys net income is sufficient to fund the dividends and the companys expected rate of earnings retention is consistent with its capital needs, asset quality and
overall financial condition. M&I depends, in part, upon dividends received from its subsidiary banks to fund its activities, including the payment of dividends. These subsidiary banks are subject to regulatory limitations on the amount of
dividends they may pay.
In 2001, Congress enacted the Uniting
and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the USA PATRIOT Act). The USA PATRIOT Act was designed to deny terrorists and criminals the ability to obtain access to
the United States financial system, and has significant implications for depository institutions, brokers, dealers and other businesses involved in the transfer of money. The USA PATRIOT Act mandates financial services companies to implement
additional policies and procedures with respect to, or additional measures designed to address, any or all of the following matters, among others: money laundering, terrorist financing, identifying and reporting suspicious activities and currency
transactions, and currency crimes.
The earnings and business
of M&I and its bank subsidiaries also are affected by the general economic and political conditions in the United States and abroad and by the monetary and fiscal policies of various federal agencies. The Federal Reserve Board impacts the
competitive conditions under which M&I operates by determining the cost of funds obtained from money market sources for lending and investing and by exerting influence on interest rates and credit conditions. In addition, legislative and
economic factors can be expected to have an ongoing impact on the competitive environment within the financial services industry. The impact of fluctuating economic conditions and federal regulatory policies on the future profitability of M&I
and its subsidiaries cannot be predicted with certainty.
Selected Statistical Information
Statistical
information relating to M&I and its subsidiaries on a consolidated basis is set forth as follows:
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(1)
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Average Balance Sheets and Analysis of Net Interest Income for each of the last three years is included in Item 7, Managements Discussion and Analysis of Financial
Condition and Results of Operations.
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(2)
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Analysis of Changes in Interest Income and Interest Expense for each of the last two years is included in Item 7, Managements Discussion and Analysis of Financial
Condition and Results of Operations.
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(3)
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Nonaccrual, Past Due and Restructured Loans and Leases for each of the last five years is included in Item 7, Managements Discussion and Analysis of Financial Condition
and Results of Operations.
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(4)
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Summary of Loan and Lease Loss Experience for each of the last five years (including the allocation of the allowance for loans and leases) is included in Item 7,
Managements Discussion and Analysis of Financial Condition and Results of Operations.
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6
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(5)
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Return on Average Shareholders Equity, Return on Average Assets and other statistical ratios for each of the last five years can be found in Item 6, Selected Financial
Data.
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(6)
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Potential Problem Loans and Leases for the last two years can be found in Item 7, Managements Discussion and Analysis of Financial Condition and Results of Operations.
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The following tables set forth certain
statistical information relating to M&I and its subsidiaries on a consolidated basis.
Investment Securities
The amortized cost of M&Is consolidated investment securities at December 31 of each year are ($ in thousands):
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2008
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2007
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2006
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U.S. Treasury and government agencies
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$
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5,664,947
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$
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5,849,041
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$
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5,521,975
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States and political subdivisions
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1,111,192
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1,267,876
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1,300,907
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Mortgage backed securities
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175,740
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119,487
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116,397
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Other
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804,184
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597,314
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499,948
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Total
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$
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7,756,063
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$
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7,833,718
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$
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7,439,227
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The maturities, at
amortized cost, and weighted average yields (for tax-exempt obligations on a fully taxable basis assuming a 35% tax rate) of investment securities at December 31, 2008 are ($ in thousands):
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Within One Year
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After One But Within
Five Years
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After Five But
Within Ten Years
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After Ten Years
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Total
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Amount
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Yield
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Amount
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Yield
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Amount
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Yield
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Amount
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Yield
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Amount
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Yield
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U.S. Treasury and government agencies
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$
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2,139,005
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3.83
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%
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$
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2,759,984
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3.83
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%
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$
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658,131
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3.83
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%
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$
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107,827
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3.83
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%
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$
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5,664,947
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3.83
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%
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States and political subdivisions
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127,115
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7.69
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154,394
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7.10
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362,037
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6.29
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467,646
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6.32
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1,111,192
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6.58
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Mortgage backed securities
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113,250
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5.26
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|
|
50,972
|
|
5.26
|
|
|
|
11,463
|
|
5.26
|
|
|
|
55
|
|
5.26
|
|
|
|
175,740
|
|
5.26
|
|
Other
|
|
|
61,934
|
|
2.66
|
|
|
|
117,619
|
|
5.39
|
|
|
|
95,731
|
|
3.36
|
|
|
|
528,900
|
|
3.68
|
|
|
|
804,184
|
|
3.81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,441,304
|
|
4.07
|
%
|
|
$
|
3,082,969
|
|
4.08
|
%
|
|
$
|
1,127,362
|
|
4.59
|
%
|
|
$
|
1,104,428
|
|
4.81
|
%
|
|
$
|
7,756,063
|
|
4.25
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7
Types of Loans and Leases
M&Is consolidated loans and leases, including loans held for sale, classified by type, at December 31 of each
year are ($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
Commercial, financial and agricultural
|
|
$
|
14,823,923
|
|
$
|
13,730,710
|
|
$
|
11,993,761
|
|
$
|
9,491,368
|
|
$
|
8,396,060
|
Industrial development revenue bonds
|
|
|
56,230
|
|
|
62,547
|
|
|
54,429
|
|
|
74,107
|
|
|
85,394
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial, financial and agriculture
|
|
|
14,880,153
|
|
|
13,793,257
|
|
|
12,048,190
|
|
|
9,565,475
|
|
|
8,481,454
|
Real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
6,091,501
|
|
|
6,691,716
|
|
|
6,088,206
|
|
|
3,641,942
|
|
|
2,265,227
|
Mortgage:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
12,937,934
|
|
|
11,518,406
|
|
|
10,670,840
|
|
|
9,884,283
|
|
|
8,548,029
|
Commercial
|
|
|
13,371,288
|
|
|
12,002,162
|
|
|
10,965,607
|
|
|
8,825,104
|
|
|
8,164,099
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage
|
|
|
26,309,222
|
|
|
23,520,568
|
|
|
21,636,447
|
|
|
18,709,387
|
|
|
16,712,128
|
Personal
|
|
|
1,929,374
|
|
|
1,560,573
|
|
|
1,458,628
|
|
|
1,621,825
|
|
|
1,536,809
|
Lease financing
|
|
|
774,294
|
|
|
730,144
|
|
|
703,580
|
|
|
632,348
|
|
|
537,930
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans and leases
|
|
|
49,984,544
|
|
|
46,296,258
|
|
|
41,935,051
|
|
|
34,170,977
|
|
|
29,533,548
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan and lease losses
|
|
|
1,202,167
|
|
|
496,191
|
|
|
420,610
|
|
|
363,769
|
|
|
358,110
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loans and leases
|
|
$
|
48,782,377
|
|
$
|
45,800,067
|
|
$
|
41,514,441
|
|
$
|
33,807,208
|
|
$
|
29,175,438
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan and Lease
Balances and Maturities
The analysis of selected loan and
lease maturities at December 31, 2008 and the rate structure for the categories indicated are ($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturity
|
|
Rate Structure of Loans and
Leases Due After One
Year
|
|
|
One Year
Or Less
|
|
Over One
Year
Through
Five Years
|
|
Over Five
Years
|
|
Total
|
|
With Pre-
determined
Rate
|
|
With
Floating
Rate
|
|
Total
|
Commercial, financial and agricultural
|
|
$
|
9,401,059
|
|
$
|
4,973,531
|
|
$
|
449,333
|
|
$
|
14,823,923
|
|
$
|
1,430,376
|
|
$
|
3,992,488
|
|
$
|
5,422,864
|
Industrial development revenue bonds
|
|
|
1,550
|
|
|
15,005
|
|
|
39,675
|
|
|
56,230
|
|
|
20,371
|
|
|
34,309
|
|
|
54,680
|
Real estateconstruction
|
|
|
3,428,744
|
|
|
2,585,057
|
|
|
77,700
|
|
|
6,091,501
|
|
|
228,934
|
|
|
2,433,823
|
|
|
2,662,757
|
Lease financing
|
|
|
151,464
|
|
|
544,059
|
|
|
78,771
|
|
|
774,294
|
|
|
622,830
|
|
|
|
|
|
622,830
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
12,982,817
|
|
$
|
8,117,652
|
|
$
|
645,479
|
|
$
|
21,745,948
|
|
$
|
2,302,511
|
|
$
|
6,460,620
|
|
$
|
8,763,131
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes:
(1)
|
|
Scheduled repayments are reported in the maturity category in which the payments are due based on the terms of the loan agreements. Demand loans, loans having no stated schedule of
repayments and no stated maturity, and overdrafts are reported as due in one year or less.
|
(2)
|
|
The estimated effect arising from the use of interest rate swaps as shown in the rate structure of loans and leases is immaterial.
|
8
Deposits
The average amount of and the average rate paid on selected deposit categories for each of the years ended December 31 is as follows ($ in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
Amount
|
|
Rate
|
|
|
Amount
|
|
Rate
|
|
|
Amount
|
|
Rate
|
|
Noninterest bearing demand deposits
|
|
$
|
5,857,485
|
|
|
|
|
$
|
5,469,774
|
|
|
|
|
$
|
5,361,014
|
|
|
|
Interest bearing demand deposits
|
|
|
2,377,091
|
|
0.63
|
%
|
|
|
2,110,546
|
|
1.49
|
%
|
|
|
2,122,694
|
|
1.47
|
%
|
Savings deposits
|
|
|
11,887,807
|
|
1.81
|
|
|
|
11,267,486
|
|
3.98
|
|
|
|
9,205,997
|
|
3.71
|
|
Time deposits
|
|
|
19,152,160
|
|
3.51
|
|
|
|
15,221,091
|
|
4.93
|
|
|
|
15,446,731
|
|
4.60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits
|
|
$
|
39,274,543
|
|
|
|
|
$
|
34,068,897
|
|
|
|
|
$
|
32,136,436
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The maturity
distribution of time deposits issued in amounts of $100,000 and over outstanding at December 31, 2008 ($ in thousands) is:
|
|
|
|
Three months or less
|
|
$
|
2,255,952
|
Over three and through six months
|
|
|
666,871
|
Over six and through twelve months
|
|
|
1,301,878
|
Over twelve months
|
|
|
8,076,441
|
|
|
|
|
Total
|
|
$
|
12,301,142
|
|
|
|
|
At December 31,
2008, time deposits issued by foreign offices totaled $1.9 billion. The majority of foreign deposits were in denominations of $100,000 or more.
Short-Term Borrowings
Information related to M&Is Federal funds purchased and security repurchase agreements for the last three years is as follows ($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Amount outstanding at year end
|
|
$
|
1,190,000
|
|
|
$
|
2,262,355
|
|
|
$
|
2,838,618
|
|
Average amount outstanding during the year
|
|
|
2,929,677
|
|
|
|
3,144,774
|
|
|
|
2,558,249
|
|
Maximum outstanding at any months end
|
|
|
3,978,229
|
|
|
|
4,078,168
|
|
|
|
3,533,812
|
|
Weighted average interest rate at year end
|
|
|
0.25
|
%
|
|
|
3.30
|
%
|
|
|
5.12
|
%
|
Weighted average interest rate during the year
|
|
|
2.09
|
|
|
|
5.03
|
|
|
|
4.99
|
|
Information relating
to the Corporations other short-term borrowings is included in Note 13 of the Notes to the Consolidated Financial Statements contained in Item 8, Consolidated Financial Statements and Supplementary Data.
9
The Corporation is subject to a number of risks that may adversely affect its financial condition and results of operations. Many of these risks are
outside of the Corporations direct control. In addition to the other information included or incorporated by reference into this report, readers should carefully consider the following important factors which, among others, could materially
impact the Corporations business, financial condition and results of operations.
The Corporations earnings are significantly affected by general business and economic conditions, including credit risk and interest rate risk.
The Corporations business and earnings are sensitive to general business and economic conditions in the United States
and, in particular, the states where it has significant operations, including Wisconsin, Arizona, Indiana, Minnesota, Missouri, Kansas and Florida. M&I Bank FSB, a subsidiary of the Corporation, is headquartered in Nevada, but its activities are
primarily outside of Nevada and it has no significant exposure to economic conditions in that state. The general business and economic conditions described above include short-term and long-term interest rates, inflation, monetary supply,
fluctuations in both debt and equity capital markets, the strength of the U.S. and local economies, real estate values, consumer spending, borrowing and saving habits, all of which are beyond the Corporations control. For example, an economic
downturn, increase in unemployment or higher interest rates could decrease the demand for loans and other products and services and/or result in a deterioration in credit quality and/or loan performance and collectability. Nonpayment of loans could
have an adverse effect on the Corporations financial condition and results of operations and cash flows. Higher interest rates also could increase the Corporations cost to borrow funds and increase the rate the Corporation pays on
deposits.
The Corporations real estate loans expose the Corporation
to increased credit risks.
A substantial portion of the
Corporations loan and lease portfolio consists of real estate-related loans, including construction and residential and commercial mortgage loans. As a result, the deterioration in the U.S. real estate markets, along with the deterioration in
the U.S. economy as a whole, has led to an increase in non-performing loans and charge-offs, and the Corporation has had to increase its allowance for loan and lease losses. Further deterioration in the commercial or residential real estate markets
and in the U.S. economy would increase the Corporations exposure to real estate-related credit risk and cause the Corporation to further increase its allowance for loan and lease losses, all of which would have a material adverse effect on the
Corporations financial condition and results of operations.
Various
factors may cause the Corporations allowance for loan and lease losses to increase.
The Corporations allowance for loan and lease losses represents managements estimate of probable losses inherent in the Corporations loan and lease portfolio. Management evaluates the allowance each
quarter to determine that it is adequate to absorb these inherent losses. This evaluation is supported by a methodology that identifies estimated losses based on assessments of individual problem loans and historical loss patterns of homogeneous
loan pools. In addition, environmental factors unique to each measurement date are also considered, including economic conditions in certain geographic or industry segments of the loan portfolio, economic trends, risk profile and portfolio
composition. The determination of the appropriate level of the allowance for loan and lease losses is highly subjective and requires management to make significant estimates of current credit risks and future trends, all of which may undergo
material changes. Changes in economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem loans and other factors, many of which are outside of the Corporations control, may require an
increase in the allowance for loan and lease losses. Any increase in the allowance for possible loan and lease losses will result in a decrease in net income and capital, and would have a material adverse effect on the Corporations financial
condition and results of operations.
A failure by the Corporation to
maintain required levels of capital could have a material adverse effect on the Corporation.
Banking regulations require the Corporation to maintain adequate levels of capital, in order to support its operations and fund outstanding liabilities.
Furthermore, each of the Corporations subsidiary banks is required to maintain specific capital levels. If any of the subsidiary banks fails to maintain the required capital levels, the subsidiary banks could be subject to various sanctions by
federal regulators that could adversely impact the
10
Corporation. Such sanctions could potentially include, without limitation, the termination of deposit insurance by the Federal Deposit Insurance Corporation,
limitations on the subsidiary banks ability to pay dividends to the Corporation and the issuance of a capital directive by a federal regulatory authority requiring an increase in capital.
The Corporations ability and the ability of its subsidiary banks to
raise additional capital, if needed, may be impaired by changes and trends in the capital markets that are outside the Corporations control. Accordingly, there can be no assurance that the Corporation or its subsidiary banks will be able to
raise additional capital, if needed on terms acceptable to the Corporation or its subsidiary banks.
There can be no assurance that recently enacted legislation will help stabilize the U.S. financial system.
The Emergency Economic Stabilization Act of 2008 (the EESA) was signed into law in 2008 in response to the financial crises affecting the
banking system and financial markets and going concern threats to investment banks and other financial institutions. Pursuant to the EESA, the United States Department of the Treasury (the UST) was granted the authority to, among other
things, purchase up to $700 billion of mortgages, mortgage-backed securities and certain other financial instruments from financial institutions for the purpose of stabilizing and providing liquidity to the U.S. financial markets. The UST announced
a Capital Purchase Program (the CPP) under the EESA pursuant to which has purchased and will continue to purchase senior preferred stock in participating financial institutions. On November 14, 2008, the Corporation entered into a
Letter Agreement, and the related Securities Purchase AgreementStandard Terms attached thereto, with the UST providing for the issuance to the UST of the Corporations Senior Preferred Stock, Series B and a warrant to purchase shares of
the Corporations common stock at a specified price.
On
February 17, 2009, the American Recovery and Reinvestment Act of 2009 (the ARRA) was signed into law. The purpose of the ARRA is to make supplemental appropriations for job preservation and creation, infrastructure investment,
energy efficiency and science, assistance to the unemployed, and state and local fiscal stabilization.
There can be no assurance as to the actual impact that these legislative initiatives will have on the financial markets or on the Corporation. The failure
of these programs to help stabilize the financial markets and a continuation or worsening of current financial market conditions could materially and adversely affect the Corporations business, financial condition, results of operations,
access to credit or the trading price of the Corporations common stock.
The failure of other financial institutions could adversely affect the Corporation.
The Corporations ability to engage in funding transactions could be adversely affected by the actions and failure of other financial institutions.
Financial institutions are interrelated as a result of trading, clearing, counterparty or other relationships. The Corporation has exposure to many different industries and counterparties, and routinely executes transactions with counterparties in
the financial industry, including brokers and dealers, commercial banks, investment banks, insurers, mutual and hedge funds, and other institutional clients. As a result, defaults by, or even questions or rumors about, one or more financial services
institutions, or the financial services industry generally, have led to market-wide liquidity problems and could lead to losses or defaults by the Corporation or other institutions. Many of these transactions expose the Corporation to credit risk in
the event of default of its counterparty or client. In addition, the Corporations credit risk may be exacerbated when collateral it holds cannot be relied upon or is liquidated at prices not sufficient to recover the full amount of exposure of
the Corporation. Any such losses could materially and adversely affect the Corporations results of operations.
Current levels of market volatility are unprecedented.
The capital and credit markets have been experiencing volatility and disruption for over a year. Recently, this volatility and disruption has reached
unprecedented levels, and in many cases has produced downward pressure on stock prices and credit availability for certain issuers without regard to the underlying financial strength of those issuers. If current levels of market disruption and
volatility continue or worsen, there can be no assurance that such conditions will not have a material adverse effect on the Corporations business, financial condition and results of operations.
11
The Corporations stock price can be volatile.
The Corporations stock price can fluctuate widely in response to a variety of factors, including the factors described
elsewhere in these Risk Factors and the following additional factors:
|
|
|
actual or anticipated variations in the Corporations quarterly results;
|
|
|
|
changes or contemplated changes in government regulations;
|
|
|
|
unanticipated losses or gains due to unexpected events, including losses or gains on securities held for investment purposes;
|
|
|
|
credit quality ratings;
|
|
|
|
new technology or services offered by the Corporations competitors;
|
|
|
|
significant acquisitions or business combinations, strategic partnerships, joint ventures or capital commitments by or involving the Corporation or its competitors;
|
|
|
|
changes in accounting policies or practices; or
|
|
|
|
failure to successfully integrate the Corporations acquisitions or realize anticipated benefits from the Corporations acquisitions.
|
Changes in the Corporations credit ratings could
adversely affect the Corporations liquidity and financial condition.
The credit ratings of the Corporation and its subsidiaries are important factors in the Corporations ability to access certain types of liquidity. A downgrade in the credit ratings of the Corporation or any of
its subsidiaries could potentially increase the cost of debt, limit the Corporations access to capital markets, require the Corporation to post collateral, or negatively impact the Corporations profitability. Furthermore, a downgrade of
the credit rating of securities issued by the Corporation or its subsidiaries could adversely affect the ability of the holders to sell those securities.
Sales or other dilution of the Corporations equity may adversely affect the market price of the Corporations common stock.
In connection with its participation in the CPP, the Corporation issued
preferred securities and a warrant representing the right to purchase the Corporations common stock. The market price of the Corporations common stock could decline as a result of sales of a large number of shares of common stock
acquired upon exercise of the warrant in the market. If the warrant is exercised, the issuance of additional common stock would dilute the ownership interest of the Corporations existing shareholders.
Terrorism, acts of war, international conflicts and natural disasters could negatively
affect the Corporations business and financial condition.
Acts or threats of war or terrorism, international conflicts (including conflict in the Middle East), natural disasters, and the actions taken by the U.S. and other governments in response to such events, could disrupt business operations
and negatively impact general business and economic conditions in the U.S. If terrorist activity, acts of war, other international hostilities or natural disasters disrupt business operations, trigger technology delays or failures, or damage
physical facilities of the Corporation, its customers or service providers, or cause an overall economic decline, the financial condition and operating results of the Corporation could be materially adversely affected. The potential for future
occurrences of these events has created many economic and political uncertainties that could seriously harm the Corporations business and results of operations in ways that cannot presently be predicted.
The Corporations earnings also are significantly affected by the fiscal and monetary
policies of the federal government and its agencies, which could affect repayment of loans and thereby materially adversely affect the Corporation.
The policies of the Federal Reserve Board impact the Corporation significantly. The Federal Reserve Board regulates the supply of money and credit in the
United States. Its policies directly and indirectly influence the rate of interest earned on loans and paid on borrowings and interest-bearing deposits and can also affect the value of financial instruments the Corporation holds. Those policies
determine to a significant extent the Corporations cost of funds for lending and investing. Changes in those policies are beyond the Corporations control and are difficult to predict.
12
Federal Reserve Board policies can affect the Corporations borrowers, potentially increasing the risk that they may fail to repay their loans. For
example, a tightening of the money supply by the Federal Reserve Board could reduce the demand for a borrowers products and services. This could adversely affect the borrowers earnings and ability to repay its loan, which could
materially adversely affect the Corporation.
The banking and financial
services industry is highly competitive, which could adversely affect the Corporations financial condition and results of operations.
The Corporation operates in a highly competitive environment in the products and services the Corporation offers and the markets in which the Corporation
serves. The competition among financial services providers to attract and retain customers is intense. Customer loyalty can be easily influenced by a competitors new products, especially offerings that provide cost savings to the customer.
Some of the Corporations competitors may be better able to provide a wider range of products and services over a greater geographic area.
The Corporation believes the banking and financial services industry will become even more competitive as a result of legislative, regulatory and
technological changes and the continued consolidation of the industry. Technology has lowered barriers to entry and made it possible for non-banks to offer products and services traditionally provided by banks, such as automatic funds transfer and
automatic payment systems. Also, investment banks and insurance companies are competing in more banking businesses such as syndicated lending and consumer banking. Many of the Corporations competitors are subject to fewer regulatory
constraints and have lower cost structures. The Corporation expects the consolidation of the banking and financial services industry to result in larger, better-capitalized companies offering a wide array of financial services and products.
Federal and state agency regulation could increase the Corporations
cost structures or have other negative effects on the Corporation.
The Corporation and M&I LLC, their subsidiary banks and many of their non-bank subsidiaries are heavily regulated at the federal and state levels. This regulation is designed primarily to protect consumers, depositors and the banking
system as a whole, not shareholders. Congress and state legislatures and federal and state regulatory agencies continually review banking laws, regulations and policies for possible changes. Changes to statutes, regulations or regulatory policies,
including changes in interpretation or implementation of statutes, regulations or policies, could affect the Corporation in substantial and unpredictable ways including limiting the types of financial services and products the Corporation may offer,
increasing the ability of non-banks to offer competing financial services and products and/or increasing the Corporations cost structures. Also, the Corporations failure to comply with laws, regulations or policies could result in
sanctions by regulatory agencies and damage to its reputation.
The
Corporation is subject to examinations and challenges by tax authorities, which, if not resolved in the Corporations favor, could adversely affect the Corporations financial condition and results of operations and cash flows.
In the normal course of business, the Corporation and its
affiliates are routinely subject to examinations and challenges from federal and state tax authorities regarding the amount of taxes due in connection with investments it has made and the businesses in which it is engaged. Recently, federal and
state taxing authorities have become increasingly aggressive in challenging tax positions taken by financial institutions. These tax positions may relate to tax compliance, sales and use, franchise, gross receipts, payroll, property and income tax
issues, including tax base, apportionment and tax credit planning. The challenges made by tax authorities may result in adjustments to the timing or amount of taxable income or deductions or the allocation of income among tax jurisdictions. If any
such challenges are made and are not resolved in the Corporations favor, they could have an adverse effect on the Corporations financial condition and results of operations and cash flows.
Consumers may decide not to use banks to complete their financial transactions, which
could result in a loss of income to the Corporation.
Technology and other changes are allowing parties to complete financial transactions that historically have involved banks at one or both ends of the transaction. For example, consumers can now pay bills and transfer funds directly without
banks. The process of eliminating banks as intermediaries, known as disintermediation, could result in the loss of fee income, as well as the loss of customer deposits and income generated from those deposits.
13
Maintaining or increasing the Corporations market share depends on market acceptance and regulatory approval of
new products and services and other factors, and the Corporations failure to achieve such acceptance and approval could harm its market share.
The Corporations success depends, in part, on its ability to adapt its products and services to evolving industry standards and to control expenses.
There is increasing pressure on financial services companies to provide products and services at lower prices. This can reduce the Corporations net interest margin and revenues from its fee-based products and services. In addition, the
Corporations success depends in part on its ability to generate significant levels of new business in its existing markets and in identifying and penetrating new markets. Growth rates for card-based payment transactions and other product
markets may not continue at recent levels. Further, the widespread adoption of new technologies, including Internet-based services, could require the Corporation to make substantial expenditures to modify or adapt its existing products and services
or render the Corporations existing products obsolete. The Corporation may not successfully introduce new products and services, achieve market acceptance of its products and services, develop and maintain loyal customers and/or break into
targeted markets.
The Corporation and M&I LLC rely on dividends from
their subsidiaries for most of their revenue, and the banking subsidiaries hold a significant portion of their assets indirectly.
The Corporation and M&I LLC are separate and distinct legal entities from their subsidiaries. They receive substantially all of their revenue from
dividends from their subsidiaries. These dividends are the principal source of funds to pay dividends on the Corporations common stock and interest on the Corporations and M&I LLCs debt. The payment of dividends by a subsidiary
is subject to federal law restrictions and to the laws of the subsidiarys state of incorporation. Furthermore, a parent companys right to participate in a distribution of assets upon a subsidiarys liquidation or reorganization is
subject to the prior claims of the subsidiarys creditors. In addition, the Corporations bank and savings association subsidiaries hold a significant portion of their mortgage loan and investment portfolios indirectly through their
ownership interests in direct and indirect subsidiaries.
The Corporation
depends on the accuracy and completeness of information about customers and counterparties, and inaccurate or incomplete information could negatively impact the Corporations financial condition and results of operations.
In deciding whether to extend credit or enter into other transactions with
customers and counterparties, the Corporation may rely on information provided to it by customers and counterparties, including financial statements and other financial information. The Corporation may also rely on representations of customers and
counterparties as to the accuracy and completeness of that information and, with respect to financial statements, on reports of independent auditors. For example, in deciding whether to extend credit to a business, the Corporation may assume that
the customers audited financial statements conform to generally accepted accounting principles and present fairly, in all material respects, the financial condition, results of operations and cash flows of the customer. The Corporation may
also rely on the audit report covering those financial statements. The Corporations financial condition and results of operations could be negatively impacted to the extent it relies on financial statements that do not comply with GAAP or that
are materially misleading.
An interruption or breach in security of the
Corporations or the Corporations third party service providers communications and information technologies could have a material adverse effect on the Corporations business.
The Corporation relies heavily on communications and information technology
to conduct its business. Any failure, interruption or breach in security of these systems could result in failures or disruptions in the Corporations customer relationship management, general ledger, deposit, loan and other systems. Despite
the Corporations policies and procedures designed to prevent or limit the effect of such a failure, interruption or security breach of its information systems, there can be no assurance that any such events will not occur or, if they do occur,
that they will be adequately addressed. The occurrence of any failures, interruptions or security breaches of the Corporations information systems could damage the Corporations reputation, result in a loss of customers or customer
business, subject the Corporation to additional regulatory scrutiny, or expose the Corporation to civil litigation and possible financial liability, any of which could have a material adverse effect on the Corporations financial condition and
results of operations.
14
In addition, the Corporation relies on third-party service providers for a substantial portion of its
communications, information, operating and financial control systems technology. If any of these third-party service providers experiences financial, operational or technological difficulties, or if there is any other disruption in the
Corporations relationships with them, the Corporation may be required to locate alternative sources of these services. There can be no assurance that the Corporation could negotiate terms as favorable to the Corporation or obtain services with
similar functionality as it currently has without the expenditure of substantial resources, if at all. Any of these circumstances could have a material adverse effect the Corporations business.
The Corporations accounting policies and methods are the basis of how the
Corporation reports its financial condition and results of operations, and they may require management to make estimates about matters that are inherently uncertain.
The Corporations accounting policies and methods are fundamental to how the Corporation records and reports its financial condition
and results of operations. The Corporations management must exercise judgment in selecting and applying many of these accounting policies and methods in order to ensure that they comply with generally accepted accounting principles and reflect
managements judgment as to the most appropriate manner in which to record and report the Corporations financial condition and results of operations. In some cases, management must select the accounting policy or method to apply from two
or more alternatives, any of which might be reasonable under the circumstances yet might result in the Corporations reporting materially different amounts than would have been reported under a different alternative.
The Corporation has identified three accounting policies as being
critical to the presentation of its financial condition and results of operations because they require management to make particularly subjective and/or complex judgments about matters that are inherently uncertain and because of the
likelihood that materially different amounts would be reported under different conditions or using different assumptions. These critical accounting policies relate to: (1) the allowance for loan and lease losses, (2) income taxes, and
(3) fair value measurements. Because of the inherent uncertainty of estimates about these matters, no assurance can be given that the application of alternative policies or methods might not result in the Corporations reporting materially
different amounts.
Changes in accounting standards could adversely affect
the Corporations reported financial results.
The
bodies that set accounting standards for public companies, including the Financial Accounting Standards Board (FASB), the Securities and Exchange Commission and others, periodically change or revise existing interpretations of the
accounting and reporting standards that govern the way that the Corporation reports its financial condition and results of operations. These changes can be difficult to predict and can materially impact the Corporations reported financial
results. In some cases, the Corporation could be required to apply a new or revised accounting standard, or a new or revised interpretation of an accounting standard, retroactively, which could have a negative impact on reported results or result in
the restatement of the Corporations financial statements for prior periods.
The Corporation has an acquisition program, which involves risks related to integration of acquired companies or businesses and the potential for the dilution of the value of the Corporations stock.
The Corporation regularly explores opportunities to acquire banking
institutions and other financial services providers. The Corporation cannot predict the number, size or timing of future acquisitions. The Corporation typically does not publicly comment on a possible acquisition or business combination until it has
signed a definitive agreement for the transaction. Once the Corporation has signed a definitive agreement, transactions of this type are generally subject to regulatory approvals and other customary conditions. There can be no assurance the
Corporation will receive such regulatory approvals without unexpected delays or conditions or that such conditions will be timely met to the Corporations satisfaction, or at all.
Difficulty in integrating an acquired company or business may cause the Corporation not to realize expected revenue
increases, cost savings, increases in geographic or product presence, and/or other projected benefits from the acquisition. Specifically, the integration process could result in higher than expected deposit attrition (run-off), loss of customers and
key employees, the disruption of the Corporations business or the business of the acquired company, or
15
otherwise adversely affect the Corporations ability to maintain existing relationships with clients, employees and suppliers or to enter into new
business relationships. The Corporation may not be able to successfully leverage the combined product offerings to the combined customer base. These factors could contribute to the Corporation not achieving the anticipated benefits of the
acquisition within the desired time frames, if at all.
Future
acquisitions could require the Corporation to issue stock, to use substantial cash or liquid assets or to incur debt. In such cases, the value of the Corporation stock could be diluted and the Corporation could become more susceptible to economic
downturns and competitive pressures.
The Corporation is dependent on senior
management, and the loss of the services of any of the Corporations senior executive officers could cause the Corporations business to suffer.
The Corporations continued success depends to a significant extent upon the continued services of its senior management. The loss of services of
any of the Corporations senior executive officers could cause the Corporations business to suffer. In addition, the Corporations success depends in part upon senior managements ability to implement the Corporations
business strategy.
The Corporation may be a defendant in a variety of
litigation and other actions, which may have a material adverse effect on its business, operating results and financial condition.
The Corporation and its subsidiaries may be involved from time to time in a variety of litigation arising out of the Corporations business. The
Corporations insurance may not cover all claims that may be asserted against it, and any claims asserted against the Corporation, regardless of merit or eventual outcome, may harm the Corporations reputation. Should the ultimate
judgments or settlements in any litigation exceed the Corporations insurance coverage, they could have a material adverse effect on the Corporations business, operating results and financial condition and cash flows. In addition, the
Corporation may not be able to obtain appropriate types or levels of insurance in the future, nor may the Corporation be able to obtain adequate replacement policies with acceptable terms, if at all.
If the Corporations share distribution and transactions related to the Separation do
not qualify as tax-free distributions or reorganizations under the Internal Revenue Code, then the Corporation and the Corporations shareholders may be responsible for payment of significant U.S. federal income taxes.
In transactions related to the Separation, old M&I distributed shares of
its common stock to effect the Separation. If the share distribution does not qualify as a tax-free distribution under Section 355 of the Internal Revenue Code, Metavante would recognize a taxable gain that would result in significant U.S.
federal income tax liabilities to Metavante. Metavante would be primarily liable for these taxes and the Corporation would be secondarily liable. Under the terms of a tax allocation agreement related to the Separation, the Corporation will generally
be required to indemnify Metavante against any such taxes unless such taxes would not have been imposed but for an act of Metavante or its affiliates, subject to specified exceptions.
Even if the Corporations share distribution otherwise qualifies as a tax-free distribution under Section 355 of
the Internal Revenue Code, the distribution would result in significant U.S. federal income tax liabilities to Metavante if there is an acquisition of the Corporations common stock or Metavantes stock as part of a plan or series of
related transactions that includes the Corporations share distribution and that results in an acquisition of 50% or more of the Corporations outstanding common stock or Metavante stock. In this situation, the Corporation may be required
to indemnify Metavante under the terms of a tax allocation agreement related to the Separation unless such taxes would not have been imposed but for specified acts of Metavante or its affiliates. In addition, mutual indemnity obligations in the tax
allocation agreement could discourage or prevent a third party from making a proposal to acquire the Corporation.
The Corporation will be restricted in its ability to issue equity for at least two years following completion of the Separation, which could limit its ability to make
acquisitions or to raise capital required to service its debt and operate its business.
The amount of equity that the Corporation can issue to make acquisitions (excluding acquisitions with respect to which the Corporation can prove the absence of substantial negotiations during applicable
safe harbor periods) or
16
raise additional capital will be limited for at least two years following completion of the Separation, except in limited circumstances. These limitations
may restrict the ability of the Corporation to carry out its business objectives and to take advantage of opportunities such as acquisitions that could supplement or grow the Corporations business.
ITEM 1B.
|
UNRESOLVED STAFF COMMENTS
|
Not applicable.
M&I and M&I Bank occupy offices on all or portions of 15 floors of a 21-story building located at 770 North Water Street, Milwaukee, Wisconsin.
M&I Bank owns the building and its adjacent 10-story parking lot and leases the remaining floors to a professional tenant. In addition, various subsidiaries of M&I lease commercial office space in downtown Milwaukee office buildings near the
770 North Water Street facility. M&I Bank also owns or leases various branch offices throughout Wisconsin, as well as 137 branch offices among the Phoenix and Tucson, Arizona metropolitan areas, Kansas City and nearby communities, Floridas
west coast and Orlando, Florida, Minneapolis/St. Paul and Duluth, Minnesota, and central Indiana. Southwest Bank owns or leases 17 offices in the St. Louis metropolitan area. M&I Bank of Mayville, a special limited purpose subsidiary of M&I
located in Mayville, Wisconsin, and M&I Bank FSB, a federal savings bank subsidiary of M&I located in Las Vegas, Nevada with one office in Milwaukee, Wisconsin, occupy modern facilities which are leased.
ITEM 3.
|
LEGAL PROCEEDINGS
|
M&I is not currently involved in any material pending legal proceedings, other than litigation of a routine nature and various legal matters which are
being defended and handled in the ordinary course of business.
ITEM 4.
|
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
|
Not applicable.
17
Executive Officers of the Registrant
(Age as of March 1, 2009)
|
|
|
Name of Officer
|
|
Office
|
Ann M. Benschoter
Age 51
|
|
Senior Vice President since December 2008 of Marshall & Ilsley Corporation; Executive Vice President since December 2008, Senior Vice President since December 2001, and Vice President since
August 1998 of M&I Marshall & Ilsley Bank; Director, Marshall & Ilsley Trust Company National Association.
|
|
|
Walt A. Buckhanan
Age 47
|
|
Vice President and Director of Corporate Diversity since December 2007 of Marshall & Ilsley Corporation; Senior Vice President since April 2008, Vice President of Diversity and Inclusion
Management from 2004 to 2007, Vice President and Strategic Sales Manager from February 2003 to 2004 of M&I Marshall & Ilsley Bank; Executive Vice President of North Milwaukee State Bank from August 2001 to February 2003.
|
|
|
Patricia M. Cadorin
Age 55
|
|
Vice President since June 2001 and Director of Corporate Communications since July 2002 of Marshall & Ilsley Corporation; Senior Vice President of M&I Marshall & Ilsley Bank since
June 2005.
|
|
|
Ryan R. Deneen
Age 44
|
|
Senior Vice President, Director of Corporate Tax of Marshall & Ilsley Corporation since December 2003; Director and President of M&I Business Credit Holdings, Inc., Manager of M&I
MEDC Fund, LLC, Director, Vice President and Treasurer of Milease, LLC, President and Secretary of M&I Marshall & Ilsley Holdings II, Inc., Vice President and Assistant Secretary of M&I LLC; Partner with KPMG LLP, a public accounting
firm, from 1986 to November 2003.
|
|
|
Thomas R. Ellis
Age 51
|
|
Senior Vice President of Marshall & Ilsley Corporation since February 2005; Executive Vice President since February 2005, Senior Vice President from 1998 to February 2005 of M&I Marshall
& Ilsley Bank; Director of Marshall & Ilsley Trust Company National Association, M&I Business Credit, LLC, M&I Equipment Finance Company, M&I Financial Advisors, Inc., M&I Insurance Services, Inc. and M&I Private Equity
Group II, LLC.
|
|
|
Randall J. Erickson
Age 49
|
|
Senior Vice President, General Counsel since June 2002, Chief Administrative Officer since April 2007, and Corporate Secretary from June 2002 to April 2007 of Marshall & Ilsley Corporation;
General Counsel since June 2002, and Corporate Secretary from June 2002 to April 2007 of M&I Marshall & Ilsley Bank; Director, Vice President and Secretary of M&I LLC, M&I Private Equity Group LLC and M&I Ventures, LLC; Director
of M&I Bank FSB, M&I Community Development Corporation, M&I Investment Partners Management, LLC, and Milease, LLC; Director and Secretary of M&I Private Equity Group II, LLC; Director and Vice President of SWB Holdings, Inc.;
Administrative Trustee of MVBI Capital Trust; Successor Administrator of Trustcorp Statutory Trust I.
|
|
|
Mark F. Furlong
Age 51
|
|
Chief Executive Officer since April 2007, President since April 2005, Executive Vice President from January 2002 to April 2005, Senior Vice President from April 2001 to January 2002, and Chief
Financial Officer from February 2007 to June 2007 and April 2001 to October 2004 of the Corporation; Director and President since July 2004, and Chief Executive Officer since April 2007 of M&I Marshall & Ilsley Bank; Director, Vice
President and Treasurer of M&I Private Equity Group LLC, and M&I Ventures L.L.C.; Director of Marshall & Ilsley Trust Company National Association, M&I Bank Mayville, M&I Equipment Finance Company, and Milease, LLC; Senior Vice
President of Southwest Bank, an M&I Bank; a Director since April 2006.
|
|
|
Mark R. Hogan
Age 54
|
|
Senior Vice President and Chief Credit Officer since October 2001 of Marshall & Ilsley Corporation; Executive Vice President since February 2005, Chief Credit Officer since November 1995,
Senior Vice President from 1995 to February 2005 of M&I Marshall & Ilsley Bank; Director of M&I Equipment Finance Company, M&I Business Credit, LLC and M&I Private Equity Group II, LLC; Director and Vice President of SWB
Holdings, Inc.
|
18
|
|
|
Name of Officer
|
|
Office
|
Patricia R. Justiliano
Age 58
|
|
Senior Vice President since 1994 and Corporate Controller since April 1989, Vice President from 1986 to 1994 of Marshall & Ilsley Corporation; Senior Vice President since April 2006, Vice
President from January 1999 to April 2006, Controller since September 1998 of M&I Marshall & Ilsley Bank; Director, President and Treasurer of M&I Marshall & Ilsley Holdings, Inc., M&I Marshall & Ilsley Investment II
Corporation, M&I Zion Investment II Corporation, M&I Zion Holdings. Inc. and SWB of St. Louis Holdings, Inc.; Director and President of M&I Marshall & Ilsley Regional Holdings, Inc.; Director, Vice President and Treasurer of M&I
Insurance Company of Arizona; Director and Treasurer of M&I Mortgage Reinsurance Corporation; Director of M&I Bank FSB, M&I Bank of Mayville, M&I Marshall & Ilsley Investment Corporation, M&I Servicing Corp., M&I Zion
Investment Corporation, M&I Custody of Nevada, Inc., SWB Investment Corporation and Louisville Realty Corporation; Vice President and Treasurer of M&I LLC; Manager of SWB of St. Louis Holdings I, LLC and SWB of St. Louis Holdings II, LLC;
Senior Vice President of Southwest Bank, an M&I Bank; and Trustee of SWB Investment II Corporation.
|
|
|
Brent J. Kelly
Age 47
|
|
Senior Vice President and Director of Marketing since February 2006 of Marshall & Ilsley Corporation; Senior Vice President, Sales & Marketing, of Cheryl&Co. from June 2002 to
December 2005, a division of 1-800-Flowers.com.
|
|
|
Beth D. Knickerbocker
Age 42
|
|
Senior Vice President, Chief Risk Officer since January 2005, Vice President, Senior Compliance Counsel from May 2004 to January 2005 of Marshall & Ilsley Corporation; Attorney at Sutherland
Asbill & Brennan LLP, a Washington, D.C. law firm, from December 2000 to May 2004.
|
|
|
Kenneth C. Krei
Age 59
|
|
Senior Vice President of Marshall & Ilsley Corporation since July 2003; Chairman of the Board since January 2005, President and Chief Executive Officer of Marshall & Ilsley Trust Company
National Association since July 2003; Chairman of the Board since January 2005, and Chief Executive Officer of M&I Investment Management Corp. since July 2003; Director and President of M&I Investment Partners Management, LLC; Chairman and
Director of M&I Financial Advisors, Inc., M&I Insurance Services, Inc., M&I Distributors LLC, and Marshall Funds; Director and Vice President of M&I Realty Advisors, Inc.; Executive Vice President, Investment Advisors at Fifth Third
Bancorp from 2001 to 2003.
|
|
|
Thomas J. ONeill
Age 48
|
|
Senior Vice President since April 1997 of Marshall & Ilsley Corporation; Executive Vice President since 2000, Senior Vice President from 1997 to 2000, Vice President from 1991 to 1997 of
M&I Marshall & Ilsley Bank; Director and President of M&I Bank FSB, M&I Dealer Finance, Inc., M&I Insurance Company of Arizona, Inc., M&I Mortgage Reinsurance Corporation; Director and Vice President of M&I Community
Development Corporation and M&I Realty Advisors, Inc.; Director of M&I Bank of Mayville, Regional Holding Company, Inc. and Louisville Realty Corporation; Manager of M&I MEDC Fund, LLC; Senior Vice President of Southwest Bank, an M&I
Bank.
|
|
|
Paul J. Renard
Age 48
|
|
Senior Vice President, Director of Human Resources since 2000, Vice President and manager since 1994 of Marshall & Ilsley Corporation; Senior Vice President of M&I Marshall & Ilsley
Bank; Vice President and Assistant Secretary of M&I LLC.
|
|
|
John L. Roberts
Age 56
|
|
Senior Vice President of Marshall & Ilsley Corporation since 1994; Senior Vice President since 1994, Vice President and Controller from 1986 to 1995 of M&I Marshall & Ilsley Bank;
Director of M&I Bank FSB; Director and President of M&I Bank of Mayville.
|
|
|
Thomas A. Root
Age 52
|
|
Senior Vice President since 1998, Audit Director since May 1996, Vice President from 1991 to 1998 of Marshall & Ilsley Corporation; Senior Vice President since April 2006, Vice President
since 1993 and Audit Director since 1999 of M&I Marshall & Ilsley Bank.
|
19
|
|
|
Name of Officer
|
|
Office
|
Gregory A. Smith
Age 45
|
|
Senior Vice President and Chief Financial Officer of Marshall & Ilsley Corporation, since June 2006; Chief Financial Officer of M&I Marshall & Ilsley Bank, since June 2006; Director
and President of M&I LLC; Director and Chief Financial Officer of Southwest Bank, an M&I Bank; Director of M&I Insurance Services, Inc., Marshall & Ilsley Trust Company National Association, M&I Financial Advisors, Inc., and
Milease, LLC; Chief Financial Officer of M&I Bank of Mayville and M&I Bank FSB; Managing Director, Investment Banking, Credit Suisse from October 2004 to June 2006; Managing Director, Investment Banking, UBS Investment Bank from April 2000
to September 2004.
|
|
|
Michael C. Smith
Age 50
|
|
Senior Vice President and Corporate Treasurer of Marshall & Ilsley Corporation, since March 2006; Senior Vice President since April 2006 of M&I Marshall & Ilsley Bank; Director and
President of M&I Northwoods III, L.L.C. and M&I Dealer Auto Securitization, LLC; Director of M&I Community Development Corporation, M&I Bank FSB, M&I Custody of Nevada, Inc., M&I Servicing Corp, M&I Marshall & Ilsley
Investment Corporation, M&I Marshall & Ilsley Investment II Corporation, M&I Marshall & Ilsley Holdings, Inc, M&I Zion Holdings, Inc., M&I Zion Investment Corporation, M&I Zion Investment II Corporation, SWB Investment
Corporation, SWB of St. Louis Holdings, Inc., and M&I Marshall & Ilsley Regional Holdings, Inc.; Manager of SWB of St. Louis Holdings I, LLC and SWB of St. Louis Holdings II, LLC; Trustee of SWB Investment II Corporation; Senior Vice
President, Southwest Bank, an M&I Bank; Successor Administrator of Trustcorp Statutory Trust I; Treasurer, AIG Consumer Finances Group from May 2001 to February 2006.
|
|
|
Ronald E. Smith
Age 62
|
|
Senior Vice President since March 2005 of Marshall & Ilsley Corporation; Executive Vice President since March 2005, Senior Vice President from 2001 to March 2005 of M&I Marshall &
Ilsley Bank.
|
20
PART II
ITEM 5.
|
|
MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
|
Stock Listing
M&Is common stock is traded under the symbol MI on the
New York Stock Exchange. Common dividends declared and the price range for M&Is common stock for each of the last five years can be found in Item 8, Consolidated Financial Statements and Supplementary Data, Quarterly Financial
Information.
A discussion of the regulatory restrictions on
the payment of dividends can be found under Item 7, Managements Discussion and Analysis of Financial Condition and Results of Operations, and in Note 15 in Item 8, Consolidated Financial Statements and Supplementary Data.
Holders of Common Equity
At December 31, 2008 M&I had approximately 15,905 record holders of
its common stock.
Shares Purchased
The following table reflects the purchases of M&I common stock for the
specified period:
|
|
|
|
|
|
|
|
|
|
Period
|
|
Total Number of Shares
Purchased (1)
|
|
Average Price
Paid Per Share
|
|
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or
Programs
|
|
Maximum
Number of Shares
that May Yet be
Purchased Under
the Plans or
Programs
|
October 1 to October 31, 2008
|
|
76,729
|
|
$
|
18.35
|
|
0
|
|
7,217,600
|
November 1 to November 30, 2008
|
|
31,372
|
|
|
15.27
|
|
0
|
|
7,217,600
|
December 1 to December 31, 2008
|
|
8,928
|
|
|
17.32
|
|
0
|
|
7,217,600
|
(1)
|
|
Amounts represent shares purchased by rabbi trusts pursuant to nonqualified deferred compensation plans for the three months ended December 31, 2008.
|
M&Is Share Repurchase Program was publicly reconfirmed in April
2006, 2007 and 2008. The Share Repurchase Program authorizes the purchase of up to 12 million shares annually and renews each year at that level unless changed or terminated by subsequent Board action. M&I did not repurchase any shares
pursuant to the Share Repurchase Program during the fourth quarter of 2008.
In connection with the Corporations participation in the CPP, the consent of the UST will be required for the Corporation to repurchase its common stock other than in connection with benefit plans consistent
with past practice and certain other specified circumstances. See Item 7, Managements Discussion and Analysis of Financial Condition and Results of OperationsLiquidity and Capital Resources for additional information regarding the
CPP.
21
ITEM 6.
|
SELECTED FINANCIAL DATA
|
Consolidated Summary of Earnings
($000s except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
Interest and Fee Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans and leases
|
|
$
|
2,926,334
|
|
|
$
|
3,243,109
|
|
|
$
|
2,856,043
|
|
|
$
|
1,959,063
|
|
|
$
|
1,432,756
|
|
Investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
286,054
|
|
|
|
311,837
|
|
|
|
277,938
|
|
|
|
214,537
|
|
|
|
200,107
|
|
Exempt from federal income taxes
|
|
|
53,750
|
|
|
|
59,237
|
|
|
|
61,769
|
|
|
|
64,127
|
|
|
|
58,826
|
|
Trading securities
|
|
|
2,530
|
|
|
|
1,012
|
|
|
|
614
|
|
|
|
229
|
|
|
|
271
|
|
Short-term investments
|
|
|
9,026
|
|
|
|
18,001
|
|
|
|
14,707
|
|
|
|
7,452
|
|
|
|
2,079
|
|
Loan to Metavante
|
|
|
|
|
|
|
35,969
|
|
|
|
43,163
|
|
|
|
43,652
|
|
|
|
22,871
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest and fee income
|
|
|
3,277,694
|
|
|
|
3,669,165
|
|
|
|
3,254,234
|
|
|
|
2,289,060
|
|
|
|
1,716,910
|
|
|
|
|
|
|
|
Interest Expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
902,944
|
|
|
|
1,231,252
|
|
|
|
1,083,392
|
|
|
|
562,552
|
|
|
|
281,271
|
|
Short-term borrowings
|
|
|
139,627
|
|
|
|
236,671
|
|
|
|
186,746
|
|
|
|
106,220
|
|
|
|
61,144
|
|
Long-term borrowings
|
|
|
454,413
|
|
|
|
585,025
|
|
|
|
476,540
|
|
|
|
329,876
|
|
|
|
196,160
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
|
1,496,984
|
|
|
|
2,052,948
|
|
|
|
1,746,678
|
|
|
|
998,648
|
|
|
|
538,575
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
1,780,710
|
|
|
|
1,616,217
|
|
|
|
1,507,556
|
|
|
|
1,290,412
|
|
|
|
1,178,335
|
|
Provision for loan and lease losses
|
|
|
2,037,707
|
|
|
|
319,760
|
|
|
|
50,551
|
|
|
|
44,795
|
|
|
|
37,963
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (loss) after provision for loan and lease losses
|
|
|
(256,997
|
)
|
|
|
1,296,457
|
|
|
|
1,457,005
|
|
|
|
1,245,617
|
|
|
|
1,140,372
|
|
|
|
|
|
|
|
Other Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wealth management
|
|
|
282,182
|
|
|
|
262,835
|
|
|
|
221,554
|
|
|
|
191,720
|
|
|
|
175,119
|
|
Net investment securities gains
|
|
|
17,229
|
|
|
|
34,814
|
|
|
|
9,701
|
|
|
|
45,514
|
|
|
|
35,336
|
|
Other
|
|
|
448,704
|
|
|
|
431,417
|
|
|
|
350,431
|
|
|
|
336,357
|
|
|
|
316,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income
|
|
|
748,115
|
|
|
|
729,066
|
|
|
|
581,686
|
|
|
|
573,591
|
|
|
|
527,355
|
|
|
|
|
|
|
|
Other Expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
|
|
723,245
|
|
|
|
659,871
|
|
|
|
613,394
|
|
|
|
549,859
|
|
|
|
494,462
|
|
Goodwill impairment
|
|
|
1,535,144
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
735,716
|
|
|
|
655,072
|
|
|
|
470,148
|
|
|
|
404,566
|
|
|
|
387,271
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expense
|
|
|
2,994,105
|
|
|
|
1,314,943
|
|
|
|
1,083,542
|
|
|
|
954,425
|
|
|
|
881,733
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(2,502,987
|
)
|
|
|
710,580
|
|
|
|
955,149
|
|
|
|
864,783
|
|
|
|
785,994
|
|
Provision (benefit) for income taxes
|
|
|
(459,525
|
)
|
|
|
213,641
|
|
|
|
307,435
|
|
|
|
278,124
|
|
|
|
256,955
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from Continuing Operations
|
|
|
(2,043,462
|
)
|
|
|
496,939
|
|
|
|
647,714
|
|
|
|
586,659
|
|
|
|
529,039
|
|
Income from discontinued operations, net of tax
|
|
|
|
|
|
|
653,997
|
|
|
|
160,124
|
|
|
|
119,531
|
|
|
|
76,814
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss)
|
|
$
|
(2,043,462
|
)
|
|
$
|
1,150,936
|
|
|
$
|
807,838
|
|
|
$
|
706,190
|
|
|
$
|
605,853
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Dividends
|
|
|
(12,737
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) Available to Common Shareholders
|
|
$
|
(2,056,199
|
)
|
|
$
|
1,150,936
|
|
|
$
|
807,838
|
|
|
$
|
706,190
|
|
|
$
|
605,853
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing Operations
|
|
$
|
(7.92
|
)
|
|
$
|
1.91
|
|
|
$
|
2.60
|
|
|
$
|
2.54
|
|
|
$
|
2.37
|
|
Discontinued operations
|
|
|
|
|
|
|
2.51
|
|
|
|
0.64
|
|
|
|
0.52
|
|
|
|
0.35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss)
|
|
$
|
(7.92
|
)
|
|
$
|
4.42
|
|
|
$
|
3.24
|
|
|
$
|
3.06
|
|
|
$
|
2.72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing Operations
|
|
$
|
(7.92
|
)
|
|
$
|
1.87
|
|
|
$
|
2.54
|
|
|
$
|
2.49
|
|
|
$
|
2.32
|
|
Discontinued operations
|
|
|
|
|
|
|
2.47
|
|
|
|
0.63
|
|
|
|
0.50
|
|
|
|
0.34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss)
|
|
$
|
(7.92
|
)
|
|
$
|
4.34
|
|
|
$
|
3.17
|
|
|
$
|
2.99
|
|
|
$
|
2.66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Significant Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on Average Shareholders Equity
|
|
|
n.m.
|
%
|
|
|
17.23
|
%
|
|
|
14.42
|
%
|
|
|
16.21
|
%
|
|
|
17.00
|
%
|
Return on Average Assets
|
|
|
n.m.
|
|
|
|
1.98
|
|
|
|
1.53
|
|
|
|
1.63
|
|
|
|
1.63
|
|
Common Dividend Declared
|
|
$
|
1.27
|
|
|
$
|
1.20
|
|
|
$
|
1.05
|
|
|
$
|
0.93
|
|
|
$
|
0.81
|
|
Dividend Payout Ratio
|
|
|
n.m.
|
%
|
|
|
27.65
|
%
|
|
|
33.12
|
%
|
|
|
31.10
|
%
|
|
|
30.45
|
%
|
Average Equity to Average Assets Ratio
|
|
|
11.01
|
|
|
|
11.48
|
|
|
|
10.64
|
|
|
|
10.07
|
|
|
|
9.59
|
|
Ratio of Earnings to Fixed Charges*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excluding Interest on Deposits
|
|
|
n.m. x
|
|
|
|
1.85 x
|
|
|
|
2.42 x
|
|
|
|
2.96 x
|
|
|
|
3.99 x
|
|
Including Interest on Deposits
|
|
|
n.m. x
|
|
|
|
1.34 x
|
|
|
|
1.54 x
|
|
|
|
1.86 x
|
|
|
|
2.44 x
|
|
*
|
|
See Exhibit 12 for detailed computation of these ratios.
|
22
Consolidated Average Balance Sheets
($000s except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
897,709
|
|
|
$
|
1,005,362
|
|
|
$
|
974,120
|
|
|
$
|
923,387
|
|
|
$
|
814,236
|
|
Investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading securities
|
|
|
197,237
|
|
|
|
56,580
|
|
|
|
45,559
|
|
|
|
26,922
|
|
|
|
22,297
|
|
Short-term investments
|
|
|
427,147
|
|
|
|
352,235
|
|
|
|
297,859
|
|
|
|
229,273
|
|
|
|
163,043
|
|
Other investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
6,454,016
|
|
|
|
6,208,495
|
|
|
|
5,664,199
|
|
|
|
4,845,549
|
|
|
|
4,672,117
|
|
Tax Exempt
|
|
|
1,158,185
|
|
|
|
1,287,066
|
|
|
|
1,303,872
|
|
|
|
1,334,793
|
|
|
|
1,199,139
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities
|
|
|
8,236,585
|
|
|
|
7,904,376
|
|
|
|
7,311,489
|
|
|
|
6,436,537
|
|
|
|
6,056,596
|
|
Loan to Metavante
|
|
|
|
|
|
|
817,885
|
|
|
|
982,000
|
|
|
|
994,055
|
|
|
|
534,519
|
|
Loans and Leases:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
14,841,714
|
|
|
|
12,672,367
|
|
|
|
11,175,436
|
|
|
|
8,954,617
|
|
|
|
7,621,077
|
|
Real estate
|
|
|
32,410,830
|
|
|
|
28,865,495
|
|
|
|
25,808,422
|
|
|
|
20,728,918
|
|
|
|
17,215,467
|
|
Personal
|
|
|
1,732,247
|
|
|
|
1,416,411
|
|
|
|
1,478,816
|
|
|
|
1,521,801
|
|
|
|
1,633,794
|
|
Lease financing
|
|
|
722,289
|
|
|
|
695,756
|
|
|
|
661,466
|
|
|
|
567,344
|
|
|
|
552,551
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans and leases
|
|
|
49,707,080
|
|
|
|
43,650,029
|
|
|
|
39,124,140
|
|
|
|
31,772,680
|
|
|
|
27,022,889
|
|
Less: Allowance for loan and lease losses
|
|
|
877,730
|
|
|
|
448,222
|
|
|
|
406,390
|
|
|
|
362,886
|
|
|
|
360,408
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loans and leases
|
|
|
48,829,350
|
|
|
|
43,201,807
|
|
|
|
38,717,750
|
|
|
|
31,409,794
|
|
|
|
26,662,481
|
|
Premises and equipment, net
|
|
|
528,846
|
|
|
|
458,819
|
|
|
|
415,150
|
|
|
|
330,273
|
|
|
|
330,492
|
|
Accrued interest and other assets
|
|
|
4,637,427
|
|
|
|
3,555,545
|
|
|
|
2,927,220
|
|
|
|
2,226,048
|
|
|
|
2,161,071
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets of continuing operations
|
|
|
63,129,917
|
|
|
|
56,943,794
|
|
|
|
51,327,729
|
|
|
|
42,320,094
|
|
|
|
36,559,395
|
|
Assets of discontinued operations
|
|
|
|
|
|
|
1,265,833
|
|
|
|
1,323,369
|
|
|
|
963,447
|
|
|
|
603,199
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
63,129,917
|
|
|
$
|
58,209,627
|
|
|
$
|
52,651,098
|
|
|
$
|
43,283,541
|
|
|
$
|
37,162,594
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest bearing
|
|
$
|
5,857,485
|
|
|
$
|
5,469,774
|
|
|
$
|
5,361,014
|
|
|
$
|
4,972,890
|
|
|
$
|
4,603,470
|
|
Interest bearing:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank issued deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank issued interest bearing activity deposits
|
|
|
14,232,732
|
|
|
|
13,490,042
|
|
|
|
11,927,756
|
|
|
|
10,415,477
|
|
|
|
10,324,517
|
|
Bank issued time deposits
|
|
|
8,998,604
|
|
|
|
8,555,413
|
|
|
|
7,592,019
|
|
|
|
4,600,614
|
|
|
|
3,436,842
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total bank issued interest bearing deposits
|
|
|
23,231,336
|
|
|
|
22,045,455
|
|
|
|
19,519,775
|
|
|
|
15,016,091
|
|
|
|
13,761,359
|
|
Wholesale deposits
|
|
|
10,185,722
|
|
|
|
6,553,668
|
|
|
|
7,255,647
|
|
|
|
6,717,682
|
|
|
|
6,044,819
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest bearing deposits
|
|
|
33,417,058
|
|
|
|
28,599,123
|
|
|
|
26,775,422
|
|
|
|
21,733,773
|
|
|
|
19,806,178
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits
|
|
|
39,274,543
|
|
|
|
34,068,897
|
|
|
|
32,136,436
|
|
|
|
26,706,663
|
|
|
|
24,409,648
|
|
Short-term borrowings
|
|
|
6,163,488
|
|
|
|
4,693,890
|
|
|
|
3,637,634
|
|
|
|
2,924,834
|
|
|
|
2,907,922
|
|
Long-term borrowings
|
|
|
9,749,118
|
|
|
|
11,533,685
|
|
|
|
10,070,881
|
|
|
|
8,189,708
|
|
|
|
5,323,774
|
|
Accrued expenses and other liabilities
|
|
|
991,056
|
|
|
|
1,072,261
|
|
|
|
1,031,954
|
|
|
|
880,447
|
|
|
|
786,067
|
|
Liabilities of discontinued operations
|
|
|
|
|
|
|
160,430
|
|
|
|
173,287
|
|
|
|
224,575
|
|
|
|
170,940
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
56,178,205
|
|
|
|
51,529,163
|
|
|
|
47,050,192
|
|
|
|
38,926,227
|
|
|
|
33,598,351
|
|
Shareholders Equity
|
|
|
6,951,712
|
|
|
|
6,680,464
|
|
|
|
5,600,906
|
|
|
|
4,357,314
|
|
|
|
3,564,243
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Shareholders Equity
|
|
$
|
63,129,917
|
|
|
$
|
58,209,627
|
|
|
$
|
52,651,098
|
|
|
$
|
43,283,541
|
|
|
$
|
37,162,594
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Significant Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Book Value Per Common Share at Year End
|
|
$
|
17.58
|
|
|
$
|
26.86
|
|
|
$
|
24.24
|
|
|
$
|
20.27
|
|
|
$
|
17.51
|
|
Average Common Shares Outstanding
|
|
|
260,272,334
|
|
|
|
260,906,330
|
|
|
|
249,723,333
|
|
|
|
231,300,867
|
|
|
|
223,123,866
|
|
|
|
|
|
|
|
Credit Quality Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loan and Lease Charge-offs to Average Loans and Leases
|
|
|
2.74
|
%
|
|
|
0.59
|
%
|
|
|
0.10
|
%
|
|
|
0.12
|
%
|
|
|
0.11
|
%
|
Total Nonperforming Loans and Leases* and OREO to End of Period Loans and Leases and OREO
|
|
|
4.24
|
|
|
|
2.24
|
|
|
|
0.70
|
|
|
|
0.44
|
|
|
|
0.48
|
|
Allowance for Loan and Lease Losses to End of Period Loans and Leases
|
|
|
2.41
|
|
|
|
1.07
|
|
|
|
1.00
|
|
|
|
1.06
|
|
|
|
1.21
|
|
Allowance for Loan and Lease Losses to Total Nonperforming Loans and Leases*
|
|
|
66
|
|
|
|
54
|
|
|
|
157
|
|
|
|
259
|
|
|
|
271
|
|
*
|
|
Nonperforming loans and leases includes nonaccrual, renegotiated, and past due 90 days or more.
|
23
ITEM 7.
|
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
Overview
For the year ended December 31, 2008, the Corporation reported a net loss of $2,043.5 million or $7.92 per diluted common share compared to income
from continuing operations for the year ended December 31, 2007 of $496.9 million or $1.87 per diluted common share.
Organic loan growth, disciplined deposit pricing, the ability to access reasonably priced funding sources and banking acquisitions completed in 2008 and
2007 contributed to the growth in net interest income and other banking sources of revenues. Despite the volatile markets, the Corporations Wealth Management segment continued to report growth in fee income.
The deterioration in the national real estate markets, economic recession and
disruption in the capital markets adversely impacted the Corporations financial condition and results of operations throughout 2008.
As a result of the unprecedented weakness in the financial markets and the decline in the Corporations common stock price, numerous tests for
goodwill impairment were performed throughout 2008. The results of goodwill impairment testing at the end of the fourth quarter of 2008 indicated that the fair value of certain of the Corporations banking-related Reporting Units were less than
their book values, resulting in a non-cash after-tax charge to earnings for goodwill impairment in the amount of $1,487.9 million or $5.73 per diluted common share. The Tier 1 and Total regulatory capital ratios were unaffected by this adjustment.
See Note 15Shareholders Equity in Notes to Consolidated Financial Statements for additional information.
The continued deterioration in the national real estate markets and the economic recession had a negative impact on the Corporations loan and lease
portfolio in 2008. In addition to a significant increase in nonperforming assets, the amount of loan impairment increased in 2008 due to the depressed state of underlying real estate collateral values. The Corporations construction and
development real estate loans, particularly in Arizona, the west coast of Florida and certain correspondent banking business channels, exhibited the most dramatic increase in stress and impairment. The increase in stress and impairment and the
accelerated disposition of problem assets resulted in net charge-offs and provision for loan and lease losses that were significantly higher in 2008 when compared to the Corporations historical experience with net charge-offs and provision for
loan and lease losses. The provision for loan and lease losses amounted to $2,037.7 million in 2008 compared to $319.8 million in 2007, an increase of $1,717.9 million. On an after-tax basis, the increase in the provision for loan and lease losses
in 2008 compared to 2007 amounted to approximately $1,099.5 million or $4.24 per diluted common share.
Throughout 2008, the Corporation experienced elevated levels of expenses due to the increase in operating costs associated with collection efforts and
carrying nonperforming assets. The Corporation estimates that the increase in expense associated with collection efforts and carrying nonperforming assets, net of related revenue, amounted to $85.5 million in 2008 compared to 2007, which, on an
after-tax basis, was approximately $0.21 per diluted common share.
The economic recession and disruption in the capital markets also resulted in an other than temporary investment security loss, write-down of a bank-owned life insurance policy, unexpected losses in the Corporations Wealth Management
segment and other credit and market related losses. Those write-downs and losses were partially offset by gains from the extinguishment of certain debt obligations, securities gains and reversals of litigation accruals associated with the
Corporations membership interests in Visa and an additional income tax benefit related to prior years. During the fourth quarter of 2008, the Corporation recorded severance expense associated with a corporate-wide reduction in force. For the
year ended December 31, 2008, these items resulted in a net pre-tax loss of $29.3 million which on an after-tax basis amounted to approximately $0.05 per diluted common share.
As previously announced, the Corporation is a participant in the United States Department of the Treasurys
(UST) Capital Purchase Program (the CPP). During the fourth quarter of 2008, the Corporation issued to the government $1.7 billion of senior perpetual preferred stock and a warrant to purchase the Corporations common
stock. At December 31, 2008, the Corporations Tier 1 ratio was 9.49 percent, $2.0 billion above the well capitalized threshold as defined by regulatory standards.
24
According to the American Bankers Association Economic Advisory Committee, the United States economy
declined at the sharpest rate in nearly three decades during the fourth quarter of 2008. In light of the economic recession and expectation that 2009 will continue to be a difficult year for the global economy and the real estate markets in
particular, the Corporation is committed to preserving its strong capital base while contributing to the objective of the CPP by continuing to lend to creditworthy consumers and businesses and continuing to provide assistance to customers who are
increasingly challenged by the economy.
In order to preserve
its strong capital base, the Corporation recently announced that it would undertake a series of significant expense reduction initiatives, reduce the quarterly common stock cash dividend to $0.01 per share and implement several risk-management
strategies to reduce its exposure to construction and development loans.
Through a freeze on filling open positions, attrition and staff reductions, the Corporation will reduce its workforce by approximately 830 positions or approximately 8% of its total workforce. Approximately 80 percent
of the workforce reductions were completed in 2008. The remaining 20 percent are related to operational efficiencies and are expected to be achieved by the end of 2009. Executive officer and other senior level salaries will be frozen in 2009 and
awards and benefits under a variety of other programs for employees will be reduced. However, the Corporations ability to use performance-based compensation elements will be severely limited under the American Recovery and Reinvestment Act of
2009 (the ARRA) regulations. As a result, the Human Resources and Compensation Committee of the Board of Directors will evaluate what actions to take in response to these regulations, including a potential reversal of the freeze on base
salary increases. The Board of Directors also reduced the annual cash retainer for directors by 25%, and the Corporation is reducing a number of other expenses. These expense initiatives are expected to reduce the Corporations expenses on an
annualized, pre-tax basis by approximately $100 million.
With
respect to credit quality, management expects the prevailing economic and national real estate market conditions will continue in 2009 and could extend into 2010. The level of net charge-offs and the recorded allowance for loan and lease losses are
based on managements best estimate of the losses incurred at the measurement date. Management recognizes there are significant estimates in the process and the ultimate losses could be significantly different from those currently estimated.
Management expects the provision for loan and lease losses will continue to be higher than its pre-2007 historical experience prior to the recession and crisis in the national real estate markets. Rapidly changing collateral values, general economic
conditions and numerous other factors continue to create volatility in the housing markets and have increased the possibility that additional losses may have to be recognized with respect to the Corporations current nonperforming assets. In
addition, further deterioration in the economy and national housing markets would likely result in an increase in the amount of nonperforming assets, net charge-offs and provisions for loan and lease losses reported in future quarters. Due to the
uncertainty caused by the recession and the resulting rise in unemployment, the crisis in the national real estate markets and numerous other unknown factors that will ultimately affect the timing and amount of nonperforming assets, net charge-offs
and the provision for loan and lease losses, it is difficult to develop reliable expectations about nonperforming assets, net charge-offs and provisions for loan and lease losses that will be recognized in 2009.
With regard to other expectations for 2009, management expects the net
interest margin will continue to experience compression based on current interest rate volatility occurring in the market together with the numerous other factors that impact net interest income and the net interest margin. Commercial and industrial
loans contracted slightly in the fourth quarter of 2008 compared to the third quarter of 2008. Commercial and industrial loan growth is expected to be in the low single-digits in 2009. Commercial real estate loan growth for 2009 is expected to be
relatively modest and consistent with the 1.9% linked quarter loan growth the Corporation experienced in the fourth quarter of 2008. Management expects construction and development real estate loans will continue to decline. Wealth Management
revenue is affected by market volatility and direction. The uncertainty that currently exists in the markets makes it difficult to make an estimate of Wealth Management revenue in 2009.
Income from continuing operations in 2007 amounted to $496.9 million or $1.87 per diluted common share compared to income
from continuing operations in 2006 of $647.7 million or $2.54 per diluted common share, a decrease of $150.8 million or $0.67 per diluted common share. The decrease in income from continuing operations in 2007 compared to 2006 was primarily
attributable to the increases in the provision for loan and lease losses. The provision for loan and lease losses amounted to $319.8 million in 2007 compared to $50.6 million in 2006, an increase of $269.2 million. On an after-tax basis, the
increase in the provision for loan and lease losses in 2007 compared to 2006 amounted to approximately $175.0 million or $0.66 per diluted common share.
25
Organic loan and bank-issued deposit growth, the two banking acquisitions completed in 2007 and a full
year of the two banking acquisitions completed in 2006 contributed to the growth in net interest income and other banking sources of revenues. Continued growth in assets under management and assets under administration and acquisitions resulted in
solid growth in fee income for Wealth Management. Increased investment securities gains and gains from branch sales were somewhat offset by lower mortgage banking revenue in 2007.
Expenses in 2007 include losses associated with two debt terminations, litigation accruals that arose from the
Corporations membership interests in Visa and a donation to support charitable works in the communities within the Corporations markets. In the aggregate, these expense and loss items amounted to approximately $134.5 million and resulted
in a decrease to income from continuing operations of $87.4 million or $0.32 per diluted common share.
On November 1, 2007, old Marshall & Ilsley Corporation, the Accounting Predecessor to new Marshall & Ilsley Corporation (which is
referred to as M&I or the Corporation) and its wholly owned subsidiary, Metavante Corporation, the Accounting Predecessor to Metavante Technologies, Inc., (which is referred to as Metavante), became two
separate publicly traded companies. The Corporation refers to this transaction as the Separation.
As part of the Separation, the Corporation received capital contributions of $1,665 million in cash from Metavante, which consisted of a contribution from
Metavante of $1,040 million and proceeds of $625 million from Metavantes issuance of a 25% equity interest to WPM L.P., an affiliate of Warburg Pincus LLC. For accounting purposes only, the investment by Warburg Pincus LLC in Metavante was
treated as a sale of 25% of Metavantes common stock by the Corporation to Warburg Pincus LLC for cash in the amount of $625 million. The sale resulted in a tax-free gain in the amount of $525.6 million. In addition, the Corporation received
$982 million in repayment of indebtedness that was due from Metavante.
The results of operations and financial condition for the periods presented include the effects of the banking-related and wealth management-related acquisitions from the dates of consummation of the acquisitions. All transactions were
accounted for using the purchase method of accounting. See Note 5 Business Combinations in Notes to Consolidated Financial Statements for a discussion of the Corporations banking and Wealth Management acquisitions completed in 2008 and
2007 and 2006.
Forward-Looking Statements
This report contains statements that may constitute forward-looking
statements within the meaning of the safe-harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, such as statements other than historical facts contained or incorporated by reference in
this report. These forward-looking statements include statements with respect to M&Is financial condition, results of operations, plans, objectives, future performance and business, including statements preceded by, followed by or that
include the words believes, expects, or anticipates, references to estimates or similar expressions. Future filings by M&I with the Securities and Exchange Commission, and future statements other than
historical facts contained in written material, press releases and oral statements issued by, or on behalf of, M&I may also constitute forward-looking statements.
All forward-looking statements contained in this report or which may be contained in future statements made for or on behalf
of M&I are based upon information available at the time the statement is made and M&I assumes no obligation to update any forward-looking statements, except as required by federal securities law. Forward-looking statements are subject to
significant risks and uncertainties, and M&Is actual results may differ materially from the expected results discussed in such forward-looking statements. Factors that might cause actual results to differ from the results discussed in
forward-looking statements include, but are not limited to, the risk factors in Item 1A, Risk Factors in this Form 10-K.
26
Significant Transactions
Some of the more noteworthy transactions and events in 2008, 2007 and 2006 consisted of the following:
2008
On January 2, 2008, the Corporation completed its acquisition of First Indiana Corporation (First Indiana) based in
Indianapolis, Indiana. First Indiana, with $2.1 billion in consolidated assets as of December 31, 2007, had 32 branches in central Indiana which became branches of M&I Marshall & Ilsley Bank on February 2, 2008. Stockholders
of First Indiana received $32.00 in cash for each share of First Indiana common stock outstanding, or approximately $530.2 million.
On November 14, 2008, as part of the CPP, the Corporation agreed to sell 1,715,000 shares of the Corporations Senior Preferred Stock, Series B
(the Senior Preferred Stock), having a liquidation preference of $1,000 per share, for a total price of $1.715 billion. The Senior Preferred Stock qualifies as Tier 1 capital and pays cumulative compounding dividends at a rate of
5% per year for the first five years and 9% per year thereafter. As a condition to participating in the CPP, the Corporation issued and sold to the UST a warrant (the Warrant) to purchase 13,815,789 shares (the Warrant
Shares) of the Corporations common stock, at an initial per share exercise price of $18.62, for an aggregate purchase price of approximately $257.25 million. The term of the Warrant is ten years. Pursuant to the Securities Purchase
Agreement entered into in connection with the transaction, until the UST no longer owns any shares of the Senior Preferred Stock, the Warrant or Warrant Shares, the Corporations employee benefit plans and other executive compensation
arrangements for its senior executive officers must continue to comply in all respects with Section 111(b) of Emergency Economic Stabilization Act of 2008 (the EESA) and the rules and regulations promulgated by the UST.
On December 3, 2008, the Corporation completed its acquisition of a
majority equity interest in Taplin, Canida & Habacht, Inc. (TCH). TCH, based in Miami, Florida, is an institutional fixed income money manager with approximately $7.3 billion of assets under management as of December 31,
2008. Total consideration paid at closing in this transaction amounted to $64.0 million, consisting of 4,863,221 shares of the Corporations common stock valued at $13.16 per common share.
On December 18, 2008, the Corporation announced it had introduced a
corporate-wide program designed to keep families in their homes by helping home owners avoid delinquency and foreclosure, including a 90-day foreclosure moratorium on all owner-occupied residential loans for customers who agree to work in good faith
to reach a successful repayment agreement. In addition to the foreclosure moratorium, the Corporations homeowner assistance program includes stipulation plans, loan modifications, extensions and short-term forbearance options that have
contributed to the higher level of renegotiated loans.
The
results of goodwill impairment testing at the end of the fourth quarter of 2008 indicated that the fair value of certain of the Corporations banking-related Reporting Units were less than their book values, resulting in an after-tax total
non-cash charge to earnings for goodwill impairment in the amount of $1,487.9 million or $5.73 per diluted common share.
During 2008, the Corporation recognized income of $39.1 million due to the completion of the initial public offering (IPO) by Visa. As a
result of the IPO, Visa redeemed 38.7% of the Class B Visa common stock owned by the Corporation. The gain from the redemption amounted to $26.9 million and is reported in Net Investment Securities Gains in the Consolidated Statements of Income. In
addition, Visa established an escrow for certain litigation matters from the proceeds of the IPO. As a result of the funded escrow, the Corporation reversed $12.2 million of the litigation accruals that were originally recorded in 2007 due to the
Corporations membership interests in Visa. The reversed accrual is reported in the Other line of Other Expense in the Consolidated Statements of Income. On an after-tax basis, these two Visa-related items reduced net loss by approximately
$0.10 per diluted common share.
During 2008, the Corporation
recognized an additional income tax benefit of $20.0 million, or $0.08 per diluted common share, related to how the TEFRA (interest expense) disallowance should be calculated within a consolidated group.
27
During 2008, the Corporation re-acquired and extinguished $169.2 million of debt. The gain amounted to
$14.7 million and is reported in Gain on Termination of Debt in the Consolidated Statements of Income. On an after-tax basis, this gain reduced net loss by approximately $0.04 per diluted common share.
Market disruptions in the equity and fixed income markets resulted in
unexpected losses in the Corporations Wealth Management segment. Losses attributable to the Lehman Brothers bankruptcy, costs of providing credit support agreements and other market related losses amounted to $45.7 million in 2008. The losses
are reported in the Other line of Other Expense in the Consolidated Statements of Income. On an after-tax basis, these losses increased net loss by approximately $0.11 per diluted common share.
The deterioration in the national real estate markets resulted in a
significant increase in the provision for losses for unfunded commitments and other credit related charges. In addition, rising fuel costs earlier in 2008 resulted in write-downs of residual values associated with consumer vehicle leases. In total
these provisions and write-downs amounted to $26.9 million and are reported in the Other line of Other Expense in the Consolidated Statements of Income. On an after-tax basis, these items increased net loss by approximately $0.07 per diluted common
share.
During 2008, the Corporation recognized a loss related
to one of its bank-owned life insurance (BOLI) policies. The BOLI policy contains a stable value agreement that provides limited cash surrender value protection from declines in the value of the policys underlying investments.
During the fourth quarter of 2008, the value of the policys underlying investments declined due to disruptions in the credit markets. As a result, the decline in cash surrender value of the policy exceeded the protection provided by the stable
value agreement. The loss amounted to $11.8 million or $0.05 per diluted common share and is reported as a reduction of Bank-Owned Life Insurance Revenue in the Consolidated Statements of Income.
During 2008, the Corporation recognized an other than temporary loss on an
investment in a small-business lending venture. The loss amounted to $10.0 million and is reported in Net Investment Securities Gains in the Consolidated Statements of Income. On an after-tax basis, this loss increased net loss by approximately
$0.02 per diluted common share.
During 2008, the Corporation
recognized severance expense of $8.7 million in conjunction with its corporate-wide reduction in workforce. The expense is reported in Salaries and Employee Benefits in the Consolidated Statements of Income. On an after-tax basis, this loss
increased net loss by approximately $0.02 per diluted common share.
2007
During 2007, the Corporation completed two banking
acquisitions and one wealth management acquisition and, as previously discussed, completed the Separation.
During 2007, the Corporation sold three bank branches located in the Tulsa, Oklahoma market after management determined that exiting that market was a
better allocation of resources as compared to the costs of further expansion in that market. The gain, which is a component of Other Income in the Consolidated Statements of Income, amounted to $29.0 million which increased income from continuing
operations by $16.9 million or $0.06 per diluted common share.
During 2007, the Corporation sold its investment in MasterCard Class B common shares in order to monetize the significant appreciation in the market price of the common stock of MasterCard since its initial public offering. The realized
gain, which is reported in Net Investment Securities Gains in the Consolidated Statements of Income, amounted to $19.0 million which increased income from continuing operations by $12.4 million or $0.05 per diluted common share.
During 2007, the Corporation called the $200 million 7.65% junior
subordinated deferrable interest debentures and the related M&I Capital Trust A 7.65% trust preferred securities. The Corporation also terminated $1,000 million of Puttable Reset Securities (PURS), senior bank notes issued by M&I
Bank. The Corporation realized losses of $83.7 million from these transactions, which are reported as Loss on Termination of Debt in the Consolidated Statements of Income. These losses reduced income from continuing operations by $54.4 million or
$0.20 per diluted common share.
28
During 2007, the Corporation recorded liabilities in connection with its share of the proposed settlement
of the American Express antitrust litigation against Visa and other Visa litigation matters. While the Corporation is not a named defendant in any of these lawsuits, the Corporation and other Visa member banks are obligated to share in losses in
connection with certain lawsuits under Visas by-laws. The expense, which is reported in Other Expense in the Consolidated Statements of Income, amounted to $25.8 million which decreased income from continuing operations by $16.8 million or
$0.06 per diluted common share.
During 2007, the Corporation
purchased $286.6 million of additional bank-owned life insurance. The net realizable value is reported, along with the Corporations other bank-owned life insurance, Bank-Owned Life Insurance in the Consolidated Balance Sheets. The increase in
net realizable value is reported in Bank-Owned Life Insurance Revenue in the Consolidated Statements of Income.
The Corporation has a tradition of being committed to the betterment of the communities within the markets that it serves. Consistent with that tradition,
the Corporation made a sizeable contribution to its charitable foundation in 2007. That expense, which is reported in Other Expense in the Consolidated Statements of Income, amounted to $25.0 million, which decreased income from continuing
operations by $16.3 million or $0.06 per diluted common share.
During 2007, the Corporation remarketed the 3.90% STACKS
SM
of M&I Capital Trust B that were originally issued in 2004 as components of the Corporations 6.50% Common SPACES
SM
. In connection with the remarketing, the annual interest rate on the remarketed STACKS was reset at 5.626%, M&I Capital Trust B was liquidated and $400 million of 5.626% senior notes that mature on
August 17, 2009 were issued by the Corporation in exchange for the outstanding STACKS. Each Common SPACES also included a stock purchase contract requiring the holder to purchase, in accordance with a settlement rate formula, shares of the
Corporations common stock. The Corporation issued 9,226,951 shares of its common stock in settlement of the stock purchase contracts in exchange for $400 million in cash.
Beginning in the second quarter and continuing throughout the remainder of 2007, the Corporation completed three accelerated
common share repurchases as well as open market repurchases of shares of its common stock under its authorized Stock Repurchase Program. In total, 10,765,889 shares of the Corporations common stock were acquired in 2007 at an aggregate cost of
$437.1 million.
2006
During 2006, the Corporation completed two banking acquisitions and one
wealth management acquisition.
Income from continuing
operations for the year ended December 31, 2006 includes the impact of 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. The affected interest rate swaps were terminated in 2006. The impact, which is reported as Net Derivative Losses Discontinued Hedges in the Consolidated Statements of Income, resulted in a decrease to income from
continuing operations of $12.0 million or $0.05 per diluted common share.
On January 1, 2006, the Corporation adopted Statement of Financial Accounting Standards No. 123 (revised 2004);
Share-Based Payment
(SFAS 123(R)), the new accounting standard that
requires all share-based compensation to be expensed. For the Corporation, additional expense was reported for its stock option awards and its employee stock purchase plan. In conjunction with the adoption of SFAS 123(R), the Corporation elected the
Modified Retrospective Application method to implement the new accounting standard. Under that method all prior period consolidated and segment financial information was adjusted based on pro forma amounts previously disclosed.
29
Net Interest Income
Net interest income is the difference between interest income on earning assets and interest expense on interest bearing liabilities.
Net interest income in 2008 amounted to $1,780.7 million
compared with net interest income of $1,616.2 million in 2007, an increase of $164.5 million or 10.2%. Positive contributors to the increase in net interest income in 2008 compared to 2007 included the impact of the acquisitions, organic loan
growth, a full year of benefit from the cash received in the Separation and the effect of the CPP cash received from the UST for one and one-half months in 2008. Factors negatively affecting net interest income compared to the prior year included
reduced interest income due to the increase in nonaccrual loans and leases, the impact of the financing costs associated with the banking acquisitions, the cost of common stock buybacks in 2007 and early 2008, the cost of purchased bank-owned life
insurance, higher wholesale funding costs and a general shift in the bank issued deposit mix from lower cost to higher cost deposit products.
Average earning assets in 2008 amounted to $57.9 billion compared to $52.4 billion in 2007, an increase of $5.5 billion or 10.6%. Increases in average
loans and leases accounted for $6.1 billion of the growth in average earning assets. Metavantes repayment of its indebtedness to the Corporation on November 1, 2007 resulted in a $0.8 billion decrease in average earning assets in 2008
compared to 2007. Average trading and short-term investments, including federal funds sold and security resale agreements, increased $0.2 billion or 52.7% in 2008 compared to 2007.
Average interest bearing liabilities increased $4.5 billion or 10.0% in 2008 compared to 2007. Average interest bearing
deposits increased $4.8 billion or 16.8% in 2008 compared to 2007. Average short-term borrowings increased $1.5 billion or 31.3% in 2008 compared to 2007. Average long-term borrowings decreased $1.8 billion or 15.5% in 2008 compared to 2007.
Average noninterest bearing deposits increased $0.4 billion or
7.1% in 2008 compared to the prior year.
Net interest income
in 2007 amounted to $1,616.2 million compared with net interest income of $1,507.6 million in 2006, an increase of $108.6 million or 7.2%. Positive contributors to the increase in net interest income in 2007 compared to 2006 included the impact of
the acquisitions, organic loan and bank issued deposit growth and the effect of the cash received from the Separation for two months in 2007. Factors negatively affecting net interest income compared to the prior year included reduced interest
income due to the increase in nonaccrual loans, the impact of the financing costs associated with the banking acquisitions and common stock buybacks, a general shift in the bank issued deposit mix from lower cost to higher cost deposit products and
the acquisition of additional bank-owned life insurance.
Average earning assets in 2007 amounted to $52.4 billion compared to $47.4 billion in 2006, an increase of $5.0 billion or 10.4%. Increases in average loans and leases accounted for 91.3% of the growth in average earning assets.
Average interest bearing liabilities increased $4.3 billion or 10.7% in
2007 compared to 2006. The growth in average interest bearing liabilities in 2007 compared to 2006 was fairly evenly distributed between average interest bearing deposits ($1.8 billion), average short-term borrowings ($1.0 billion) and average long
term borrowings ($1.5 billion).
Average noninterest bearing
deposits increased $0.1 billion or 2.0% in 2007 compared to the prior year.
30
The growth and composition of the Corporations average loan and lease portfolio for the current
year and prior two years are reflected in the following table ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent
Growth
|
|
|
|
2008
|
|
2007
|
|
2006
|
|
2008
vs
2007
|
|
|
2007
vs
2006
|
|
Commercial:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
14,841.7
|
|
$
|
12,672.3
|
|
$
|
11,175.4
|
|
17.1
|
%
|
|
13.4
|
%
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial mortgages
|
|
|
12,805.7
|
|
|
11,382.9
|
|
|
10,345.6
|
|
12.5
|
|
|
10.0
|
|
Construction
|
|
|
4,476.4
|
|
|
3,738.9
|
|
|
2,793.0
|
|
19.7
|
|
|
33.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial real estate
|
|
|
17,282.1
|
|
|
15,121.8
|
|
|
13,138.6
|
|
14.3
|
|
|
15.1
|
|
Commercial lease financing
|
|
|
520.8
|
|
|
514.3
|
|
|
516.0
|
|
1.3
|
|
|
(0.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial
|
|
|
32,644.6
|
|
|
28,308.4
|
|
|
24,830.0
|
|
15.3
|
|
|
14.0
|
|
Personal:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgages
|
|
|
7,849.4
|
|
|
6,672.7
|
|
|
5,735.9
|
|
17.6
|
|
|
16.3
|
|
Construction
|
|
|
2,377.8
|
|
|
2,793.5
|
|
|
2,394.3
|
|
(14.9
|
)
|
|
16.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total residential real estate
|
|
|
10,227.2
|
|
|
9,466.2
|
|
|
8,130.2
|
|
8.0
|
|
|
16.4
|
|
Consumer loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Student
|
|
|
104.3
|
|
|
85.0
|
|
|
68.6
|
|
22.7
|
|
|
23.8
|
|
Credit card
|
|
|
262.4
|
|
|
244.7
|
|
|
231.4
|
|
7.3
|
|
|
5.8
|
|
Home equity loans and lines
|
|
|
4,901.6
|
|
|
4,277.4
|
|
|
4,539.6
|
|
14.6
|
|
|
(5.8
|
)
|
Other
|
|
|
1,365.5
|
|
|
1,086.8
|
|
|
1,178.8
|
|
25.6
|
|
|
(7.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer loans
|
|
|
6,633.8
|
|
|
5,693.9
|
|
|
6,018.4
|
|
16.5
|
|
|
(5.4
|
)
|
Personal lease financing
|
|
|
201.5
|
|
|
181.5
|
|
|
145.5
|
|
11.0
|
|
|
24.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total personal
|
|
|
17,062.5
|
|
|
15,341.6
|
|
|
14,294.1
|
|
11.2
|
|
|
7.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consolidated average loans and leases
|
|
$
|
49,707.1
|
|
$
|
43,650.0
|
|
$
|
39,124.1
|
|
13.9
|
%
|
|
11.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average loans and
leases increased $6.1 billion or 13.9% in 2008 compared to 2007. Excluding the effect of the banking acquisitions, total consolidated average loan and lease organic growth was 9.0% in 2008 compared to 2007. Approximately $2.0 billion of the growth
in total consolidated average loans and leases was attributable to the banking acquisitions and $4.1 billion of the growth was organic. Of the $2.0 billion of average growth attributable to the banking acquisitions, $0.8 billion was attributable to
average commercial real estate loans, $0.5 billion was attributable to average commercial loans and leases, $0.4 billion was attributable to average residential real estate loans and $0.2 billion was attributable to average home equity loans and
lines of credit. Of the $4.1 billion of average loan and lease organic growth, $1.7 billion was attributable to average commercial loans and leases, $1.4 billion was attributable to average commercial real estate loans, $0.3 billion was attributable
to residential real estate loans, $0.4 billion was attributable to average home equity loans and lines of credit and the remainder was due to other consumer loans and leases.
Total average commercial loan and lease organic growth was $1.7 billion or 12.0% in 2008 compared to 2007. Total average
commercial loan and lease organic growth was strong throughout the first nine months of 2008. That double-digit percentage growth was driven by new business, increased utilization of credit lines by existing customers, declining interest rates and
increased exports due to the weaker U.S. dollar. On a linked quarter basis, total average commercial loan and leases contracted slightly in the fourth quarter of 2008 compared to the third quarter of 2008 as the recession deepened. Management
expects that organic commercial loan growth (as a percentage) will be significantly slower than the growth experienced in 2008. Management expects organic commercial loan and lease growth will be in the low single-digits in 2009 compared to 2008.
Average organic commercial real estate loan growth was $1.4
billion or 8.7% in 2008 compared to 2007. The Corporation continues to experience slowing in construction and development activity which is the result of significant declines in new construction in all of the Corporations markets, less
investor activity in new construction projects and softening in retail and hospitality expansion. Investor activity in multi-family and medical office has been the least
31
impacted. The supply and demand of office facilities appears to be in relative balance in the Corporations markets. However, a significant increase in
job losses could adversely affect this sector in future periods. For 2009, organic commercial real estate loan growth is expected to be relatively modest and consistent with the 1.9% linked quarter loan growth the Corporation experienced in the
fourth quarter of 2008 compared to the third quarter of 2008.
Average home equity loans and lines, which include the Corporations wholesale activity, increased $0.6 billion or 14.6% in 2008 compared to 2007. This growth reflects, in part, the decline in the national investor base and the shift
of more production that meets the Corporations underwriting criteria to portfolio. Management expects this trend to continue in the near-term. Average home equity loan and line growth due to the acquisitions amounted to $0.2 billion in 2008
compared to 2007.
The Corporation sells some of its
residential real estate loan production (residential real estate and home equity loans) in the secondary market. As previously discussed, selected residential real estate loans with credit, rate and term characteristics that are considered desirable
are periodically retained in the portfolio. Residential real estate loans originated and sold to the secondary market amounted to $1.4 billion in 2008 compared to $1.8 billion in 2007. At December 31, 2008 and 2007, residential mortgage loans
held for sale amounted to $40.3 million. The housing market and the decline in the national investor base continued to adversely affect the origination-for-sale business in 2008. Gains from the sale of mortgage loans amounted to $22.4 million in
2008 compared to $28.6 million in 2007.
The sub-prime mortgage
banking environment has been experiencing considerable strain from rising delinquencies and liquidity pressures and some sub-prime lenders have failed. The increased scrutiny of the sub-prime lending market is one of the factors that have impacted
general market conditions as well as perceptions of the mortgage origination business. The Corporation considers sub-prime loans to be those loans with high loan-to-value, temporary below market interest rates, which are sometimes referred to as
teaser rates, or interest deferral options at the time of origination and credit scores that are less than 620. The Corporation believes that loans with these characteristics have contributed to the high levels of foreclosures and losses the
industry is currently experiencing. The Corporation does not originate sub-prime mortgages or sub-prime home equity loans or lines for its own portfolio. However, in 2008 and 2007 the Corporation experienced losses and may continue to have loss
exposure from loans to entities that are associated with sub-prime mortgage banking. The Corporation does not originate mortgage loans with variable interest-only payment plans, commonly referred to as option ARMs. Option ARMs may
include low introductory interest plans with significant escalation in the rate when the agreement calls for the rate to reset. The borrower may also be able to fix the monthly payment amount, potentially resulting in negative amortization of the
loan. The Corporation does not originate mortgage loans that permit negative amortization. A negative amortization provision in a mortgage allows the borrower to defer payment of a portion or all of the monthly interest accrued on the mortgage and
to add the deferred interest amount to the mortgages principal balance subject to a stated maximum permitted amount of negative amortization. Once the maximum permitted amount of negative amortization is reached, the borrowers monthly
payment is reset and is usually significantly higher than the monthly payment made during periods of negative amortization. The Corporations Alt-A products were offered to borrowers with higher credit scores and lower loan-to-value ratios who
chose the convenience of less than full documentation in exchange for higher reserve requirements and a higher mortgage rate. The Corporations adjustable rate mortgage loans were underwritten to fully-indexed rates. The Corporations
Alt-A products were changed in the first quarter of 2008 to include full verification of the borrowers income and ability to service the debt.
Average loans and leases increased $4.5 billion or 11.6% in 2007 compared to 2006. Excluding the effect of the banking acquisitions, total consolidated
average loan and lease organic growth was 7.2% in 2007 compared to 2006. Approximately $1.6 billion of the growth in total consolidated average loans and leases was attributable to the banking acquisitions and $2.9 billion of the growth was organic.
Of the $1.6 billion of average growth attributable to the banking acquisitions, $1.1 billion was attributable to average commercial real estate loans, $0.4 billion was attributable to average commercial loans and leases and the remainder was
primarily attributable to average residential real estate loans. Of the $2.9 billion of average loan and lease organic growth, $1.1 billion was attributable to average commercial loans and leases, $0.9 billion was attributable to average commercial
real estate loans, and $1.3 billion was attributable to residential real estate loans. Average home equity loans and lines decreased $0.3 billion in 2007 compared to 2006.
Total average commercial loan and lease organic growth was 9.1% in 2007 compared to 2006. Total average commercial real estate organic
growth was 6.3% in 2007 compared to 2006.
32
Average home equity loans and lines, which include the Corporations wholesale activity, declined
$0.3 billion or 5.8% in 2007 compared to 2006. An increased number of originations with selected credit, rate and term characteristics were retained on balance sheet in 2007.
Residential real estate loans (residential real estate and home equity loans) originated and sold to the secondary market
amounted to $1.8 billion in 2007 compared to $2.3 billion in 2006. At December 31, 2007, residential mortgage loans held for sale amounted to $40.3 million compared to $139.3 million at December 31, 2006. The housing market and the decline
in the national investor base adversely affected the origination-for-sale business in 2007. Gains from the sale of mortgage loans amounted to $28.6 million in 2007 compared to $47.3 million in 2006.
Average automobile loans, which are included in other personal loans in the
table above, amounted to $359.5 million in 2007 compared to $465.1 million in 2006, a decrease of $105.6 million or 22.7%. Auto loans securitized and sold amounted to $0.2 billion in 2007 compared to $0.5 billion in 2006. During the second quarter
of 2007, the Corporation opted to discontinue the sale and securitization of automobile loans into the secondary market on a recurring basis. Gains and losses from the sale and securitization of auto loans, including write-downs of auto loans held
for sale, were not significant in 2007 or 2006. See Note 9 in Notes to Consolidated Financial Statements for further discussion of the Corporations securitization activities.
The Corporation refers to certain types of loans that are secured by real estate as construction and development loans.
Certain construction and development loans currently have a higher risk profile because the value of the underlying collateral is dependent on the housing-related real estate markets and these loans are concentrated in markets experiencing elevated
levels of stress. Construction and development loans consist of:
Commercial Construction
Loans primarily to mid-sized local and regional companies to construct a variety of commercial projects.
Commercial Land
Loans primarily to mid-sized local and regional companies to acquire and develop land for a variety of commercial projects.
Residential Construction by Individuals
Loans to
individuals to construct 1-4 family homes.
Residential Land
Loans
primarily to individuals and mid-sized local and regional builders to acquire and develop land for 1-4 family homes.
Residential Construction by Developers
Loans primarily to mid-sized local and regional builders to construct 1-4 family homes in residential subdivisions.
The growth and composition of the Corporations average
construction and development loans for the current year and previous year are reflected in the following table:
Consolidated Average Construction and Development Loans ($ in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Growth
|
|
|
|
2008
|
|
2007
|
|
Amount
|
|
|
Percent
|
|
Commercial:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
$
|
4,476
|
|
$
|
3,739
|
|
$
|
737
|
|
|
19.7
|
%
|
Land
|
|
|
966
|
|
|
819
|
|
|
147
|
|
|
17.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial
|
|
|
5,442
|
|
|
4,558
|
|
|
884
|
|
|
19.4
|
|
|
|
|
|
|
Residential:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction by individuals
|
|
|
992
|
|
|
1,003
|
|
|
(11
|
)
|
|
(1.1
|
)
|
Land
|
|
|
2,345
|
|
|
2,458
|
|
|
(113
|
)
|
|
(4.6
|
)
|
Construction by developers
|
|
|
1,386
|
|
|
1,791
|
|
|
(405
|
)
|
|
(22.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total residential
|
|
|
4,723
|
|
|
5,252
|
|
|
(529
|
)
|
|
(10.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consolidated average construction and development loans
|
|
$
|
10,165
|
|
$
|
9,810
|
|
$
|
355
|
|
|
3.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33
Total consolidated average construction and development loans increased approximately $0.4 billion or
3.6% in 2008 compared to 2007. Total consolidated average construction and development loans in 2008 include approximately $0.3 billion of average construction and development loans that were attributable to the banking acquisitions in that year.
At December 31, 2008, total consolidated construction and
development loans outstanding amounted to $9.0 billion, a decrease of $1.1 billion or 10.5% since December 31, 2007. Approximately $3.2 billion or 35.2% of these loans were loans associated with Arizona, the west coast of Florida and
correspondent banking business channels at December 31, 2008. Nonperforming construction and development loans represented 56.1% of the Corporations total consolidated nonperforming loans and leases at December 31, 2008.
Nonperforming construction and development loans associated with Arizona, the west coast of Florida and correspondent banking business channels represented 37.1% of the Corporations total consolidated nonperforming loans and leases at
December 31, 2008.
The growth and composition of the
Corporations consolidated average deposits for 2008 and prior two years are reflected below ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent
Growth
|
|
|
|
2008
|
|
2007
|
|
2006
|
|
2008
vs
2007
|
|
|
2007
vs
2006
|
|
Bank issued deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest bearing:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
4,237.7
|
|
$
|
3,915.8
|
|
$
|
3,850.8
|
|
8.2
|
%
|
|
1.7
|
%
|
Personal
|
|
|
1,015.9
|
|
|
963.5
|
|
|
961.3
|
|
5.4
|
|
|
0.2
|
|
Other
|
|
|
603.9
|
|
|
590.5
|
|
|
548.9
|
|
2.3
|
|
|
7.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest bearing
|
|
|
5,857.5
|
|
|
5,469.8
|
|
|
5,361.0
|
|
7.1
|
|
|
2.0
|
|
Interest bearing:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Activity accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings and NOW
|
|
|
3,247.8
|
|
|
2,905.0
|
|
|
3,031.5
|
|
11.8
|
|
|
(4.2
|
)
|
Money market
|
|
|
9,186.7
|
|
|
8,674.3
|
|
|
7,482.5
|
|
5.9
|
|
|
15.9
|
|
Foreign activity
|
|
|
1,798.2
|
|
|
1,910.8
|
|
|
1,413.7
|
|
(5.9
|
)
|
|
35.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total activity accounts
|
|
|
14,232.7
|
|
|
13,490.1
|
|
|
11,927.7
|
|
5.5
|
|
|
13.1
|
|
Time deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other CDs and time
|
|
|
5,031.5
|
|
|
4,734.0
|
|
|
4,496.8
|
|
6.3
|
|
|
5.3
|
|
CDs $100,000 and over
|
|
|
3,967.1
|
|
|
3,821.4
|
|
|
3,095.2
|
|
3.8
|
|
|
23.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total time deposits
|
|
|
8,998.6
|
|
|
8,555.4
|
|
|
7,592.0
|
|
5.2
|
|
|
12.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest bearing
|
|
|
23,231.3
|
|
|
22,045.5
|
|
|
19,519.7
|
|
5.4
|
|
|
12.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total bank issued deposits
|
|
|
29,088.8
|
|
|
27,515.3
|
|
|
24,880.7
|
|
5.7
|
|
|
10.6
|
|
|
|
|
|
|
|
Wholesale deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market
|
|
|
1,829.2
|
|
|
1,798.8
|
|
|
814.7
|
|
1.7
|
|
|
120.8
|
|
NOW
|
|
|
1.2
|
|
|
|
|
|
|
|
n.m.
|
|
|
n.m.
|
|
Brokered CDs
|
|
|
7,393.7
|
|
|
3,737.4
|
|
|
5,011.1
|
|
97.8
|
|
|
(25.4
|
)
|
Foreign time
|
|
|
961.6
|
|
|
1,017.4
|
|
|
1,429.9
|
|
(5.5
|
)
|
|
(28.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total wholesale deposits
|
|
|
10,185.7
|
|
|
6,553.6
|
|
|
7,255.7
|
|
55.4
|
|
|
(9.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consolidated average deposits
|
|
$
|
39,274.5
|
|
$
|
34,068.9
|
|
$
|
32,136.4
|
|
15.3
|
%
|
|
6.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average total bank
issued deposits increased $1.6 billion or 5.7% in 2008 compared to 2007. Excluding the effect of the banking acquisitions, average total bank issued deposits declined 1.1% in 2008 compared to 2007. Approximately $1.9 billion of the growth in average
total bank issued deposits was attributable to the banking acquisitions, which was offset by a decline in organic bank issued deposits of $0.3 billion. Of the $1.9 billion of average growth attributable to the banking acquisitions, $0.3 billion was
attributable to average noninterest bearing
34
deposits, $1.1 billion was attributable to average interest bearing activity deposits and $0.5 billion was attributable to average time deposits. Average
organic noninterest bearing deposits increased $0.1 billion in 2008 compared to 2007. Average organic interest bearing activity deposits decreased $0.3 billion and average organic time deposits decreased $0.1 billion in 2008 compared to 2007.
Noninterest 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 deposit 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. The decline in average organic interest deposit bearing activity
deposits and average organic time deposit reflects the recent increased level of high-priced competition to attract deposits and the Corporations decision to maintain its pricing discipline. The Corporation continued to experience shifts in
the bank issued deposit mix. In their search for higher yields in the low interest rate environment, both new and existing customers have been migrating their deposit balances to higher cost deposit products. Management expects this behavior to
continue.
Wholesale deposits are deposits generated through
distribution channels other than the Corporations own banking branches. The Corporation continues to make use of wholesale funding alternatives, especially brokered and institutional certificates of deposit. The weighted average maturity of
brokered and institutional certificates of deposit issued in 2008 was 11.6 years and the weighted average remaining term of outstanding brokered and institutional certificates of deposit at December 31, 2008 was 10.6 years. Wholesale deposits
outstanding at December 31, 2008 cannot be put back to the Corporation by investors other than in the case of death or adjudication of incompetence. These deposits allow the Corporations 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. Average wholesale deposits increased $3.6 billion or 55.4% in 2008 compared to 2007. Average wholesale deposits in 2008
include $0.1 billion of average wholesale deposits that were assumed in the 2008 and 2007 banking acquisitions.
Management currently believes that it has adequate liquidity to ensure that funds are available to the Corporation and each of its banks to satisfy their
cash flow requirements. However, if capital markets deteriorate more than management currently expects, the Corporation could experience stress on its liquidity position. The Corporation maintains back-up liquidity contingency plans for
unanticipated market events.
Average total bank issued
deposits increased $2.6 billion or 10.6% in 2007 compared to 2006. Excluding the effect of the banking acquisitions, average total bank issued deposit organic growth was 4.6% in 2007 compared to 2006. Approximately $1.4 billion of the growth in
average total bank issued deposits was attributable to the banking acquisitions and $1.2 billion of the growth was organic. Of the $1.4 billion of average growth attributable to the banking acquisitions, $0.2 billion was attributable to average
noninterest bearing deposits, $0.5 billion was attributable to average interest bearing activity deposits and $0.7 billion was attributable to average time deposits. Of the $1.2 billion of average bank issued deposit organic growth, $1.1 billion was
attributable to average interest bearing activity deposits and $0.2 billion was attributable to average time deposits. Average organic noninterest bearing deposits declined $0.1 billion in 2007 compared to 2006.
During 2007, the Corporation was able to competitively price deposit products
and maintain pricing discipline which contributed to the growth in average interest bearing bank issued deposits and average bank issued time deposits. The bank issued deposit mix continued to shift in 2007. In their search for higher yields, both
new and existing customers migrated their deposit balances to higher cost money market and time deposit products.
Average wholesale deposits decreased $0.7 billion in 2007 compared to 2006. Average wholesale deposits in 2007 include $0.2 billion of average wholesale
deposits that were assumed in the 2007 and 2006 banking acquisitions.
Total borrowings decreased $3.0 billion and amounted to $13.7 billion at December 31, 2008 compared to $16.7 billion at December 31, 2007. Total average borrowings amounted to $15.9 billion in 2008 compared to $16.2 billion in
2007 a decrease of $0.3 billion or 1.9%. Throughout 2008, the Corporation made greater use of short-term borrowings as well as wholesale funding alternatives as previously discussed. The increased use of short-term borrowings and wholesale funding
alternatives was in response to the widening of credit spreads and general lack of demand by investors for longer term bank debt that was prevalent throughout 2008. During 2008, the Corporation called $27 million in aggregate principal amount of
various higher-cost junior subordinated deferrable interest
35
debentures and the related trust preferred securities that had been assumed in acquisitions. During 2008, the Corporation re-acquired and extinguished $169.2
million of debt. The gain amounted to $14.7 million and is reported in Gain on Termination of Debt in the Consolidated Statements of Income.
During 2007, the Corporation called the $200 million 7.65% junior subordinated deferrable interest debentures and the related M&I Capital Trust A
7.65% trust preferred securities. This transaction resulted in a loss of $9.5 million that is reported in Loss on Termination of Debt in the Consolidated Statements of Income and was primarily due to the contractual call premium paid to retire the
debentures and trust preferred securities. During 2007, $370.0 million of floating rate Federal Home Loan Bank (FHLB) advances were extinguished and the pay fixed / receive floating interest rate swaps that were designated as cash flow
hedges on the FHLB advances were terminated. The gain realized from these transactions was primarily due to the acceleration of the fair value adjustments for the interest rate swaps that were recorded in other comprehensive income. That gain
amounted to $5.3 million and is reported in the Other line of Other Income in the Consolidated Statements of Income. Also during 2007, the Corporation remarketed the 3.90% STACKS of M&I Capital Trust B and issued $400.0 million of 5.626% senior
notes of the Corporation that mature on August 17, 2009 in exchange for the STACKS. As a result of the illiquid market and prohibitive cost of remarketing, the $1.0 billion PURS were terminated in 2007. The loss, which was primarily the cost of
purchasing the right to remarket the PURS through 2016, amounted to $74.2 million and is reported in Loss on Termination of Debt in the Consolidated Statements of Income.
The net interest margin on a fully taxable equivalent basis (FTE) as a percent of average earning assets was 3.12% in 2008
compared to 3.14% in 2007, a decrease of two basis points. The yield on average earning assets was 5.70% in 2008 compared to 7.05% in 2007, a decrease of 135 basis points. The cost of interest bearing liabilities was 3.03% in 2008 compared to 4.58%
in 2007, a decrease of 155 basis points.
There were many
factors that affected the Corporations net interest margin in 2008. Some of these factors included the movement of new and existing deposits into higher cost products, loan growth that exceeded the Corporations ability to generate lower
cost bank-issued deposits, a volatile interest rate environment, higher credit spreads and liquidity premiums for term financing and elevated levels of nonaccrual and renegotiated loans. Acquisitions for cash, the buyback of common shares and the
purchase of bank-owned life insurance reduced net interest income and were additional sources of contraction to the net interest margin. Management continues to believe that margin contraction is more likely than margin expansion. In a very low
interest rate environment, earning assets will continue to re-price downward. However, many deposit categories have re-priced to their floors. As a result, the net interest margin FTE as a percent of average earning assets could continue to have
modest downward pressure in the near term. 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 Corporations markets,
prepayment activity, future interest rate changes, levels of nonaccrual and renegotiated loans and various other factors.
The net interest margin FTE as a percent of average earning assets was 3.14% in 2007 compared to 3.24% in 2006, a decrease of 10 basis points. The yield
on average earning assets was 7.05% in 2007 compared to 6.91% in 2006, an increase of 14 basis points. The cost of interest bearing liabilities was 4.58% in 2007 compared to 4.31% in 2006, an increase of 27 basis points.
36
Average Balance Sheets and Analysis of Net Interest Income
The Corporations consolidated average balance sheets, interest earned
and interest paid, and the average interest rates earned and paid for each of the last three years are presented in the following table ($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
Average
Balance
|
|
|
Interest
Earned/
Paid
|
|
Average
Yield or
Cost (3)
|
|
|
Average
Balance
|
|
|
Interest
Earned/
Paid
|
|
Average
Yield or
Cost (3)
|
|
|
Average
Balance
|
|
|
Interest
Earned/
Paid
|
|
Average
Yield or
Cost (3)
|
|
Loans and leases (1)(2)
|
|
$
|
49,707,080
|
|
|
$
|
2,928,699
|
|
5.89
|
%
|
|
$
|
43,650,029
|
|
|
$
|
3,244,771
|
|
7.43
|
%
|
|
$
|
39,124,140
|
|
|
$
|
2,857,956
|
|
7.30
|
%
|
Investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
6,454,016
|
|
|
|
286,054
|
|
4.40
|
|
|
|
6,208,495
|
|
|
|
311,837
|
|
4.97
|
|
|
|
5,664,199
|
|
|
|
277,938
|
|
4.82
|
|
Tax-exempt (1)
|
|
|
1,158,185
|
|
|
|
78,782
|
|
6.82
|
|
|
|
1,287,066
|
|
|
|
85,706
|
|
6.71
|
|
|
|
1,303,872
|
|
|
|
89,865
|
|
6.97
|
|
Federal funds sold and security resale agreements
|
|
|
223,000
|
|
|
|
5,613
|
|
2.52
|
|
|
|
204,170
|
|
|
|
10,712
|
|
5.25
|
|
|
|
227,082
|
|
|
|
11,546
|
|
5.08
|
|
Trading securities (1)
|
|
|
197,237
|
|
|
|
2,974
|
|
1.51
|
|
|
|
56,580
|
|
|
|
1,101
|
|
1.95
|
|
|
|
45,559
|
|
|
|
659
|
|
1.45
|
|
Other short-term investments
|
|
|
204,147
|
|
|
|
3,413
|
|
1.67
|
|
|
|
148,065
|
|
|
|
7,289
|
|
4.92
|
|
|
|
70,777
|
|
|
|
3,161
|
|
4.47
|
|
Loan to Metavante
|
|
|
|
|
|
|
|
|
|
|
|
|
817,885
|
|
|
|
35,969
|
|
4.40
|
|
|
|
982,000
|
|
|
|
43,163
|
|
4.40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest earning assets
|
|
|
57,943,665
|
|
|
|
3,305,535
|
|
5.70
|
%
|
|
|
52,372,290
|
|
|
|
3,697,385
|
|
7.05
|
%
|
|
|
47,417,629
|
|
|
|
3,284,288
|
|
6.91
|
%
|
Cash and demand deposits due from banks
|
|
|
897,709
|
|
|
|
|
|
|
|
|
|
1,005,362
|
|
|
|
|
|
|
|
|
|
974,120
|
|
|
|
|
|
|
|
Premises and equipment, net
|
|
|
528,846
|
|
|
|
|
|
|
|
|
|
458,819
|
|
|
|
|
|
|
|
|
|
415,150
|
|
|
|
|
|
|
|
Other assets
|
|
|
4,637,427
|
|
|
|
|
|
|
|
|
|
3,555,545
|
|
|
|
|
|
|
|
|
|
2,927,220
|
|
|
|
|
|
|
|
Allowance for loan and lease losses
|
|
|
(877,730
|
)
|
|
|
|
|
|
|
|
|
(448,222
|
)
|
|
|
|
|
|
|
|
|
(406,390
|
)
|
|
|
|
|
|
|
Assets of discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
1,265,833
|
|
|
|
|
|
|
|
|
|
1,323,369
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
63,129,917
|
|
|
|
|
|
|
|
|
$
|
58,209,627
|
|
|
|
|
|
|
|
|
$
|
52,651,098
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank issued deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank issued interest bearing activity deposits
|
|
$
|
14,232,732
|
|
|
$
|
219,562
|
|
1.54
|
%
|
|
$
|
13,490,042
|
|
|
$
|
478,978
|
|
3.55
|
%
|
|
$
|
11,927,756
|
|
|
$
|
399,037
|
|
3.35
|
%
|
Bank issued time deposits
|
|
|
8,998,604
|
|
|
|
359,091
|
|
3.99
|
|
|
|
8,555,413
|
|
|
|
420,428
|
|
4.91
|
|
|
|
7,592,019
|
|
|
|
334,371
|
|
4.40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total bank issued deposits
|
|
|
23,231,336
|
|
|
|
578,653
|
|
2.49
|
|
|
|
22,045,455
|
|
|
|
899,406
|
|
4.08
|
|
|
|
19,519,775
|
|
|
|
733,408
|
|
3.76
|
|
Wholesale deposits
|
|
|
10,185,722
|
|
|
|
324,291
|
|
3.18
|
|
|
|
6,553,668
|
|
|
|
331,846
|
|
5.06
|
|
|
|
7,255,647
|
|
|
|
349,984
|
|
4.82
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest bearing deposits
|
|
|
33,417,058
|
|
|
|
902,944
|
|
2.70
|
|
|
|
28,599,123
|
|
|
|
1,231,252
|
|
4.31
|
|
|
|
26,775,422
|
|
|
|
1,083,392
|
|
4.05
|
|
Short-term borrowings
|
|
|
6,163,488
|
|
|
|
139,627
|
|
2.27
|
|
|
|
4,693,890
|
|
|
|
236,671
|
|
5.04
|
|
|
|
3,637,634
|
|
|
|
186,746
|
|
5.13
|
|
Long-term borrowings
|
|
|
9,749,118
|
|
|
|
454,413
|
|
4.66
|
|
|
|
11,533,685
|
|
|
|
585,025
|
|
5.07
|
|
|
|
10,070,881
|
|
|
|
476,540
|
|
4.73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest bearing liabilities
|
|
|
49,329,664
|
|
|
|
1,496,984
|
|
3.03
|
%
|
|
|
44,826,698
|
|
|
|
2,052,948
|
|
4.58
|
%
|
|
|
40,483,937
|
|
|
|
1,746,678
|
|
4.31
|
%
|
Noninterest bearing deposits
|
|
|
5,857,485
|
|
|
|
|
|
|
|
|
|
5,469,774
|
|
|
|
|
|
|
|
|
|
5,361,014
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
991,056
|
|
|
|
|
|
|
|
|
|
1,072,261
|
|
|
|
|
|
|
|
|
|
1,031,954
|
|
|
|
|
|
|
|
Liabilities of discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
160,430
|
|
|
|
|
|
|
|
|
|
173,287
|
|
|
|
|
|
|
|
Shareholders equity
|
|
|
6,951,712
|
|
|
|
|
|
|
|
|
|
6,680,464
|
|
|
|
|
|
|
|
|
|
5,600,906
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
63,129,917
|
|
|
|
|
|
|
|
|
$
|
58,209,627
|
|
|
|
|
|
|
|
|
$
|
52,651,098
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
|
|
|
$
|
1,808,551
|
|
|
|
|
|
|
|
|
$
|
1,644,437
|
|
|
|
|
|
|
|
|
$
|
1,537,610
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net yield on interest earning assets
|
|
|
|
|
|
|
|
|
3.12
|
%
|
|
|
|
|
|
|
|
|
3.14
|
%
|
|
|
|
|
|
|
|
|
3.24
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes:
(1)
|
|
Fully taxable equivalent basis, assuming a Federal income tax rate of 35% for all years presented, and excluding disallowed interest expense.
|
(2)
|
|
Loans and leases on nonaccrual status have been included in the computation of average balances.
|
(3)
|
|
Based on average balances excluding fair value adjustments for available for sale securities.
|
37
Analysis of Changes in Interest Income and Interest Expense
The effects on interest income and interest expense due to volume and rate
changes are outlined in the following table. Changes not due solely to either volume or rate are allocated to rate ($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 versus 2007
|
|
|
2007 versus 2006
|
|
|
|
Increase (Decrease) Due
to Change in
|
|
|
|
|
|
Increase (Decrease) Due
to Change in
|
|
|
|
|
|
|
Average
Volume
(2)
|
|
|
Average
Rate
|
|
|
Increase
(Decrease)
|
|
|
Average
Volume
(2)
|
|
|
Average
Rate
|
|
|
Increase
(Decrease)
|
|
Interest on earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans and leases (1)
|
|
$
|
450,039
|
|
|
$
|
(766,111
|
)
|
|
$
|
(316,072
|
)
|
|
$
|
330,390
|
|
|
$
|
56,425
|
|
|
$
|
386,815
|
|
Investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
11,433
|
|
|
|
(37,216
|
)
|
|
|
(25,783
|
)
|
|
|
24,245
|
|
|
|
9,654
|
|
|
|
33,899
|
|
Tax-exempt (1)
|
|
|
(8,160
|
)
|
|
|
1,236
|
|
|
|
(6,924
|
)
|
|
|
(784
|
)
|
|
|
(3,375
|
)
|
|
|
(4,159
|
)
|
Federal funds sold and security resale agreements
|
|
|
989
|
|
|
|
(6,088
|
)
|
|
|
(5,099
|
)
|
|
|
(1,164
|
)
|
|
|
330
|
|
|
|
(834
|
)
|
Trading securities (1)
|
|
|
2,743
|
|
|
|
(870
|
)
|
|
|
1,873
|
|
|
|
160
|
|
|
|
282
|
|
|
|
442
|
|
Other short-term investments
|
|
|
2,759
|
|
|
|
(6,635
|
)
|
|
|
(3,876
|
)
|
|
|
3,455
|
|
|
|
673
|
|
|
|
4,128
|
|
Loan to Metavante
|
|
|
(35,987
|
)
|
|
|
18
|
|
|
|
(35,969
|
)
|
|
|
(7,221
|
)
|
|
|
27
|
|
|
|
(7,194
|
)
|
Total interest income change
|
|
$
|
392,204
|
|
|
$
|
(784,054
|
)
|
|
$
|
(391,850
|
)
|
|
$
|
339,899
|
|
|
$
|
73,198
|
|
|
$
|
413,097
|
|
Expense on interest bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank issued deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank issued interest bearing activity deposits
|
|
$
|
26,365
|
|
|
$
|
(285,781
|
)
|
|
$
|
(259,416
|
)
|
|
$
|
52,337
|
|
|
$
|
27,604
|
|
|
$
|
79,941
|
|
Bank issued time deposits
|
|
|
21,761
|
|
|
|
(83,098
|
)
|
|
|
(61,337
|
)
|
|
|
42,389
|
|
|
|
43,668
|
|
|
|
86,057
|
|
Total bank issued deposits
|
|
|
48,384
|
|
|
|
(369,137
|
)
|
|
|
(320,753
|
)
|
|
|
94,966
|
|
|
|
71,032
|
|
|
|
165,998
|
|
Wholesale deposits
|
|
|
183,782
|
|
|
|
(191,337
|
)
|
|
|
(7,555
|
)
|
|
|
(33,835
|
)
|
|
|
15,697
|
|
|
|
(18,138
|
)
|
Total interest bearing deposits
|
|
|
207,653
|
|
|
|
(535,961
|
)
|
|
|
(328,308
|
)
|
|
|
73,860
|
|
|
|
74,000
|
|
|
|
147,860
|
|
Short-term borrowings
|
|
|
74,068
|
|
|
|
(171,112
|
)
|
|
|
(97,044
|
)
|
|
|
54,186
|
|
|
|
(4,261
|
)
|
|
|
49,925
|
|
Long-term borrowings
|
|
|
(90,478
|
)
|
|
|
(40,134
|
)
|
|
|
(130,612
|
)
|
|
|
69,191
|
|
|
|
39,294
|
|
|
|
108,485
|
|
Total interest expense change
|
|
$
|
206,236
|
|
|
$
|
(762,200
|
)
|
|
$
|
(555,964
|
)
|
|
$
|
187,173
|
|
|
$
|
119,097
|
|
|
$
|
306,270
|
|
Notes:
(1)
|
|
Fully taxable equivalent basis, assuming a Federal income tax rate of 35% for all years presented, and excluding disallowed interest expense.
|
(2)
|
|
Based on average balances excluding fair value adjustments for available for sale securities.
|
38
Summary of Loan and Lease Loss Experience and Credit Quality
The following table presents credit quality information as of and for the
year ended December 31, 2008, as well as selected comparative years:
Consolidated Credit Quality Information
December 31, ($000s)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
Nonperforming Assets by Type
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans and Leases:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonaccrual (1)
|
|
$
|
1,526,950
|
|
|
$
|
686,888
|
|
|
$
|
264,890
|
|
|
$
|
134,718
|
|
|
$
|
127,722
|
|
Renegotiated
|
|
|
270,357
|
|
|
|
224,398
|
|
|
|
125
|
|
|
|
143
|
|
|
|
236
|
|
Past Due 90 Days or More
|
|
|
14,528
|
|
|
|
13,907
|
|
|
|
2,991
|
|
|
|
5,725
|
|
|
|
4,405
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Nonperforming Loans and Leases
|
|
|
1,811,835
|
|
|
|
925,193
|
|
|
|
268,006
|
|
|
|
140,586
|
|
|
|
132,363
|
|
Other Real Estate Owned
|
|
|
320,908
|
|
|
|
115,074
|
|
|
|
25,452
|
|
|
|
8,869
|
|
|
|
8,056
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Nonperforming Assets
|
|
$
|
2,132,743
|
|
|
$
|
1,040,267
|
|
|
$
|
293,458
|
|
|
$
|
149,455
|
|
|
$
|
140,419
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for Loan and Lease Losses
|
|
$
|
1,202,167
|
|
|
$
|
496,191
|
|
|
$
|
420,610
|
|
|
$
|
363,769
|
|
|
$
|
358,110
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Statistics
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Charge-offs to Average Loans and Leases
|
|
|
2.74
|
%
|
|
|
0.59
|
%
|
|
|
0.10
|
%
|
|
|
0.12
|
%
|
|
|
0.11
|
%
|
Total Nonperforming Loans and Leases to Total Loans and Leases
|
|
|
3.62
|
|
|
|
2.00
|
|
|
|
0.64
|
|
|
|
0.41
|
|
|
|
0.45
|
|
Total Nonperforming Assets to Total Loans and Leases and Other Real Estate Owned
|
|
|
4.24
|
|
|
|
2.24
|
|
|
|
0.70
|
|
|
|
0.44
|
|
|
|
0.48
|
|
Allowance for Loan and Lease Losses to Total Loans and Leases
|
|
|
2.41
|
|
|
|
1.07
|
|
|
|
1.00
|
|
|
|
1.06
|
|
|
|
1.21
|
|
Allowance for Loan and Lease Losses to Nonperforming Loans and Leases
|
|
|
66
|
|
|
|
54
|
|
|
|
157
|
|
|
|
259
|
|
|
|
271
|
|
(1)
|
|
For 2008, includes $69,139 of nonaccrual loans that are intended to be sold. Nonaccrual loans held for sale are carried at the lower of cost or fair value.
|
Nonperforming loans and leases consist of nonaccrual, troubled-debt
restructured loans, which the Corporation refers to as renegotiated, and loans and leases that are delinquent 90 days or more and still accruing interest. Nonperforming assets consist of nonperforming loans and leases and other real estate owned
(OREO). The Corporation employs a credit review and approval process to help ensure that the amount of nonperforming assets on a long-term basis is maintained within the overall framework of acceptable levels of credit risk. In addition
to the negative impact on net interest income and credit losses, nonperforming assets also increase operating costs due to the expense associated with collection efforts and the expenses of carrying OREO.
The Corporation had a significant increase in nonperforming assets in 2008
and 2007 compared to prior years. The increase has been primarily attributable to real estate related loans in areas that were previously experiencing substantial population growth and increased demand for housing such as Arizona and Florida. The
Corporations higher growth markets have been disproportionately affected by the excess real estate inventory and deterioration in the national real estate markets as the economy deteriorated into recession.
The Corporation has worked aggressively to isolate, identify and assess its
underlying loan and lease portfolio credit quality and has developed and continues to develop strategies to reduce and mitigate its loss exposure. During 2008, the Corporation sold $430.9 million of nonperforming loans. In addition, at
December 31, 2008, the Corporation held $69.1 million of nonaccrual loans that are intended to be sold.
Generally, loans that are 90 days or more past due as to interest or principal are placed on nonaccrual. Exceptions to these rules are generally only for
loans fully collateralized by readily marketable securities or other relatively risk free collateral and certain personal loans. A loan may be placed on nonaccrual when management makes a
39
determination that the facts and circumstances warrant such classification irrespective of the current payment status. At December 31, 2008,
approximately $470.3 million or 26.0% of the Corporations total nonperforming loans and leases were 10 days or less past due. In total, approximately $638.7 million or 35.3% of the Corporations total nonperforming loans and leases were
less than 90 days past due at December 31, 2008. The amount of cumulative charge-offs recorded on the Corporations nonaccrual loans outstanding at December 31, 2008 was approximately $664.1 million or 49.0% of the unpaid principal
balance of the affected nonaccrual loans and 30.3% of the unpaid principal balance of its total nonaccrual loans outstanding at December 31, 2008.
At December 31, 2008, nonperforming loans and leases amounted to $1,811.8 million or 3.62% of consolidated loans and leases compared to $925.2
million or 2.00% of consolidated loans and leases at December 31, 2007 and $268.0 million or 0.64% of consolidated loans and leases at December 31, 2006.
Nonaccrual loans and leases are the largest component of nonperforming loans and leases and amounted to $1,527.0 million or
3.05% of consolidated loans and leases at December 31, 2008 compared to $686.9 million or 1.48% of consolidated loans and leases at December 31, 2007 and $264.9 million or 0.63% at December 31, 2006.
At December 31, 2008, renegotiated loans and leases amounted to $270.4
million. Approximately $259.8 million or 96.1% of the renegotiated loans and leases at December 31, 2008 were real estate and home equity loans. Approximately $214.3 million or 82.5% of the renegotiated real estate and home equity loans at
December 31, 2008 were loans secured by real estate located in Arizona. At December 31, 2008, approximately $135.3 million or 52.1% of the renegotiated real estate and home equity loans were construction and development loans.
The Corporation recognizes that the current recession and declining real
estate values have resulted in many customers being far more leveraged than prudent and in a very difficult financial position. Potentially distressed homeowners are identified in advance, and proactively offered assistance. In order to avoid
foreclosure in the future, the Corporation has restructured loan terms for certain qualified borrowers that have demonstrated the ability to make the restructured payments for a specified period of time. The Corporations foreclosure abatement
program includes several options, including stipulation plans, loan modifications, term extensions, short-term forbearance options and reduced rates that can be used, as necessary and applicable, to reduce contractual payments. In addition, the
Corporation has implemented a 90-day foreclosure moratorium on all owner-occupied residential loans for customers who agree to work in good faith to reach a successful repayment agreement. The moratorium applies to loans in all the
Corporations markets and extends through March 31, 2009. The Corporation expects nonaccrual loans will initially increase until the loan terms are restructured. Upon restructuring, nonacrrual loans will decline and the balance of
renegotiated loans will increase. The Corporation expects the balance of renegotiated loans will continue to increase in future quarters.
The balance of renegotiated loans at the end of 2007 consisted primarily of the renegotiated portion of the Franklin Credit Management Corp.
(Franklin) loan, which was $224.3 million at December 31, 2007. That balance was reclassified out of renegotiated loans in the first quarter of 2008. In the second half of 2008, Franklin experienced declining cash collections,
rising delinquencies and higher than expected servicing expenses. These factors indicated that there was additional impairment associated with Franklin. As a result, charge-offs totaling $45.8 million were taken in the third and fourth quarters of
2008. These charge-offs represented the remaining subordinated tranches of Franklin. At December 31, 2008, the Corporations exposure to the accruing portion of Franklin amounted to $107.1 million.
40
The following table presents the major categories of nonperforming loans and leases, including nonaccrual
loans held for sale, at December 31, 2008 and 2007:
Major Categories of Nonperforming Loans and Leases
($ in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
December 31, 2007
|
|
|
|
Total
Loans &
Leases
|
|
Percent of
Total
Loans &
Leases
|
|
|
Non-
performing
Loans &
Leases
|
|
Percent
Non-
performing
to Loan &
Lease Type
|
|
|
Total
Loans &
Leases
|
|
Percent of
Total
Loans &
Leases
|
|
|
Non-
performing
Loans &
Leases
|
|
Percent
Non-
performing to
Loan &
Lease Type
|
|
Commercial Loans & Leases
|
|
$
|
15,442
|
|
30.9
|
%
|
|
$
|
180.5
|
|
1.17
|
%
|
|
$
|
14,326
|
|
31.0
|
%
|
|
$
|
273.1
|
|
1.91
|
%
|
Commercial Real Estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Land & Construction
|
|
|
5,063
|
|
10.1
|
|
|
|
314.7
|
|
6.22
|
|
|
|
4,957
|
|
10.7
|
|
|
|
216.1
|
|
4.36
|
|
Other Commercial Real Estate
|
|
|
12,542
|
|
25.1
|
|
|
|
188.2
|
|
1.50
|
|
|
|
11,097
|
|
24.0
|
|
|
|
84.2
|
|
0.76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Commercial Real Estate
|
|
|
17,605
|
|
35.2
|
|
|
|
502.9
|
|
2.86
|
|
|
|
16,054
|
|
34.7
|
|
|
|
300.3
|
|
1.87
|
|
|
|
|
|
|
|
|
|
|
Residential Real Estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1-4 Family
|
|
|
5,734
|
|
11.5
|
|
|
|
324.3
|
|
5.66
|
|
|
|
4,593
|
|
9.9
|
|
|
|
59.6
|
|
1.30
|
|
Construction by Individuals
|
|
|
881
|
|
1.7
|
|
|
|
99.2
|
|
11.26
|
|
|
|
1,041
|
|
2.2
|
|
|
|
10.5
|
|
1.01
|
|
Residential Land & Construction by Developers
|
|
|
3,099
|
|
6.2
|
|
|
|
603.4
|
|
19.47
|
|
|
|
4,111
|
|
8.9
|
|
|
|
223.1
|
|
5.43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Residential Real Estate
|
|
|
9,714
|
|
19.4
|
|
|
|
1,026.9
|
|
10.57
|
|
|
|
9,745
|
|
21.0
|
|
|
|
293.2
|
|
3.01
|
|
|
|
|
|
|
|
|
|
|
Consumer Loans & Leases
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home Equity Loans & Lines of Credit
|
|
|
5,082
|
|
10.2
|
|
|
|
86.5
|
|
1.70
|
|
|
|
4,413
|
|
9.5
|
|
|
|
50.7
|
|
1.15
|
|
Other Consumer Loans & Leases
|
|
|
2,142
|
|
4.3
|
|
|
|
15.0
|
|
0.70
|
|
|
|
1,758
|
|
3.8
|
|
|
|
7.9
|
|
0.45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Consumer Loans & Leases
|
|
|
7,224
|
|
14.5
|
|
|
|
101.5
|
|
1.41
|
|
|
|
6,171
|
|
13.3
|
|
|
|
58.6
|
|
0.95
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Loans & Leases
|
|
$
|
49,985
|
|
100.0
|
%
|
|
$
|
1,811.8
|
|
3.62
|
%
|
|
$
|
46,296
|
|
100.0
|
%
|
|
$
|
925.2
|
|
2.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming
commercial loans and leases amounted to $180.5 million at December 31, 2008 compared to $273.1 million at December 31, 2007, a decrease of $92.6 million or 33.9%. Included in nonperforming commercial loans and leases at December 31,
2007 was the Franklin loan discussed above.
Nonperforming real
estate loans represented 84.4% of total nonperforming loans and leases and amounted to $1,529.8 million at December 31, 2008 compared to $593.5 million at December 31, 2007, an increase of $936.3 million or 157.8%. At December 31,
2007, nonperforming real estate loans represented 64.1% of total nonperforming loans and leases. Nonperforming real estate loans, other than home equity loans and lines of credit, exhibited the largest increase in 2008 compared to 2007. Those
increases reflect the effects of the recession and deterioration in the national real estate markets. This housing-related stress exists in all of the Corporations markets and includes both core and acquired loans. More specifically, the
Corporations construction and development real estate loans exhibited the most dramatic increase in stress and impairment. The increase in stress and impairment was most notable in the geographical markets of the west coast of Florida and
Arizona and, the correspondent banking business channel which includes construction and development real estate loans that are geographically dispersed.
Nonperforming construction and development loans (which include commercial land and construction, construction by individuals and residential land and
construction by developers) amounted to $1,017.3 million and represented 56.1% of total nonperforming loans and leases at December 31, 2008. By comparison, nonperforming construction and development loans amounted to $449.7 million and
represented 48.6% of total nonperforming loans and leases at December 31, 2007. The increase in nonperforming construction and development loans in 2008 compared to 2007 amounted to $567.6 million or 126.2% which was 60.6% of the total increase
in nonperforming real estate loans in 2008 compared to 2007.
41
Nonperforming 1-4 family residential real estate loans amounted to $324.3 million at December 31,
2008 compared to $59.6 million at December 31, 2007, an increase of $264.7 million. Increased economic stress on consumers has resulted in further deterioration in these loans in all of the Corporations markets and most notably in
Arizona, which contributed $196.7 million or 74.3% of the increase in nonperforming 1-4 family residential real estate loans at December 31, 2008 compared to December 31, 2007.
Nonperforming consumer loans and leases amounted to $101.5 million at December 31, 2008 compared to $58.6 million at
December 31, 2007, an increase of $42.9 million or 73.2%. Approximately 83.4% of that increase was due to the increase in nonperforming home equity loans and lines of credit in 2008 compared to 2007. As is the case with nonperforming 1-4 family
residential real estate loans, increased economic stress on consumers has resulted in further deterioration in consumer loans and leases in all of the Corporations markets.
The following tables present a geographical summary of nonperforming loans and leases, including nonaccrual loans held for
sale, at December 31, 2008 and 2007:
Geographical
Summary of Nonperforming Loans & Leases
($ in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
|
Total
Loans &
Leases
|
|
Percent
of
Total
Loans
&
Leases
|
|
|
Non-
performing
Loans &
Leases
|
|
Percent
Non-
performing
to Loan &
Lease Type
|
|
|
Percent
Nonperforming
Construction &
Development to
Total
Nonperforming
Loans
&
Leases
|
|
Wisconsin
|
|
$
|
18,048
|
|
36.1
|
%
|
|
$
|
180.4
|
|
1.00
|
%
|
|
19.1
|
%
|
Arizona
|
|
|
7,489
|
|
15.0
|
|
|
|
857.5
|
|
11.45
|
|
|
68.3
|
|
Minnesota
|
|
|
5,210
|
|
10.4
|
|
|
|
146.2
|
|
2.81
|
|
|
36.3
|
|
Missouri
|
|
|
3,491
|
|
7.0
|
|
|
|
59.2
|
|
1.70
|
|
|
34.8
|
|
Florida
|
|
|
3,086
|
|
6.2
|
|
|
|
172.8
|
|
5.60
|
|
|
65.7
|
|
Kansas & Oklahoma
|
|
|
1,282
|
|
2.6
|
|
|
|
35.6
|
|
2.77
|
|
|
30.1
|
|
Indiana
|
|
|
1,613
|
|
3.2
|
|
|
|
51.7
|
|
3.21
|
|
|
32.4
|
|
Others
|
|
|
9,766
|
|
19.5
|
|
|
|
308.4
|
|
3.16
|
|
|
59.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
49,985
|
|
100.0
|
%
|
|
$
|
1,811.8
|
|
3.62
|
%
|
|
56.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
|
Total
Loans &
Leases
|
|
Percent
of
Total
Loans
&
Leases
|
|
|
Non-
performing
Loans &
Leases
|
|
Percent
Non-
performing
to Loan &
Lease Type
|
|
|
Percent
Nonperforming
Construction &
Development to
Total
Nonperforming
Loans
&
Leases
|
|
Wisconsin
|
|
$
|
17,375
|
|
37.5
|
%
|
|
$
|
92.9
|
|
0.53
|
%
|
|
13.4
|
%
|
Arizona
|
|
|
7,706
|
|
16.7
|
|
|
|
182.0
|
|
2.36
|
|
|
78.4
|
|
Minnesota
|
|
|
4,965
|
|
10.7
|
|
|
|
49.2
|
|
0.99
|
|
|
47.6
|
|
Missouri
|
|
|
3,159
|
|
6.8
|
|
|
|
29.8
|
|
0.94
|
|
|
38.8
|
|
Florida
|
|
|
2,884
|
|
6.2
|
|
|
|
197.3
|
|
6.84
|
|
|
86.3
|
|
Kansas & Oklahoma
|
|
|
1,303
|
|
2.8
|
|
|
|
31.1
|
|
2.38
|
|
|
62.3
|
|
Indiana
|
|
|
343
|
|
0.7
|
|
|
|
4.1
|
|
1.20
|
|
|
N/A
|
|
Others (a)
|
|
|
8,561
|
|
18.6
|
|
|
|
338.8
|
|
3.96
|
|
|
20.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
46,296
|
|
100.0
|
%
|
|
$
|
925.2
|
|
2.00
|
%
|
|
48.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
Nonperforming loans and leases at December 31, 2007 included the renegotiated Franklin loan in the amount of $224.3 million.
|
42
The housing-related stress continued in both core and acquired loans. Nonperforming loans in Arizona
amounted to $857.5 million, which was 47.3% of total consolidated nonperforming loans and leases at December 31, 2008. Approximately $585.5 million or 68.3% of nonperforming loans in Arizona at December 31, 2008 were construction and
development loans. By comparison, at December 31, 2007, nonperforming loans in Arizona amounted to $182.0 million, which was 19.7% of total consolidated nonperforming loans and leases at December 31, 2007. Approximately $142.7 million or
78.4% of nonperforming loans in Arizona at December 31, 2007 were construction and development loans. Nonperforming loans in Florida amounted to $172.8 million or 5.60% of total Florida loans at December 31, 2008 compared to nonperforming
loans in Florida of $197.3 million or 6.84% of total Florida loans at December 31, 2007. Approximately $113.5 million or 65.7% of nonperforming loans in Florida at December 31, 2008 were construction and development loans. By comparison,
approximately $170.3 million or 86.3% of nonperforming loans in Florida at December 31, 2007 were construction and development loans. While the level of nonperforming loans in relation to total loans remains elevated in Florida, the Corporation
believes that the amount of its nonperforming construction and development loans in Florida may be showing signs of stabilizing.
Loans 90 days past due and still accruing amounted to $14.5 million at December 31, 2008 compared to $13.9 million at December 31, 2007 and $3.0
million at December 31, 2006.
Delinquency can be an
indicator of potential problem loans and leases. At December 31, 2008, loans and leases past due 60-89 days and still accruing interest amounted to $348.8 million or 0.70% of total loans and leases outstanding compared to $183.5 million or
0.40% of total loans and leases outstanding at December 31, 2007, an increase of $165.3 million. Approximately $97.2 million or 58.8% of the increase relates to construction and land development loans and $87.4 million of the increase relates
to other real estate-related loans. Commercial loans and leases past due 60-89 days and still accruing interest decreased $19.3 million at December 31, 2008 compared to December 31, 2007. Loans and leases past due 60-89 days and still
accruing interest amounted to $89.1 million or 0.21% of total loans and leases outstanding at December 31, 2006.
In addition to its nonperforming loans and leases, the Corporation has loans and leases for which payments are presently current, but which management
believes could possibly be classified as nonperforming in the near future. These loans are subject to constant management attention and their classification is reviewed on an ongoing basis. At December 31, 2008, such loans amounted to $880.6
million or 1.76% of total loans and leases outstanding compared to $469.2 million or 1.01% of total loans and leases outstanding at December 31, 2007 and $109.1 million or 0.26% of total loans and leases outstanding at December 31, 2006.
OREO is principally comprised of commercial and residential
properties acquired in partial or total satisfaction of problem loans. OREO amounted to $320.9 million at December 31, 2008, compared to $115.1 million at December 31, 2007. At December 31, 2008, properties acquired in partial or
total satisfaction of problem loans, based on loan type, consisted of construction and development of $245.7 million, 1-4 family residential real estate of $63.1 million and commercial real estate of $12.1 million. At December 31, 2007,
properties acquired in partial or total satisfaction of problem loans, based on loan type, consisted of construction and development of $65.9 million, 1-4 family residential real estate of $26.6 million and commercial real estate of $22.6 million.
OREO in Arizona represented approximately 50.8% of total OREO at December 31, 2008. As a result of the soft real estate market and the increased possibility of foreclosures due to the elevated levels of nonperforming loans, management expects
that OREO will continue to increase in future quarters.
43
The following table presents the reconciliation of the consolidated allowance for loan and lease losses
for the year ended December 31, 2008, as well as selected comparative years:
Reconciliation of Consolidated Allowance for Loan and Lease Losses ($000s)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
Allowance for Loan and Lease Losses at Beginning of Year
|
|
$
|
496,191
|
|
$
|
420,610
|
|
$
|
363,769
|
|
$
|
358,110
|
|
$
|
349,561
|
Provision for Loan and Lease Losses
|
|
|
2,037,707
|
|
|
319,760
|
|
|
50,551
|
|
|
44,795
|
|
|
37,963
|
Allowance of Banks and Loans Acquired
|
|
|
32,110
|
|
|
11,713
|
|
|
45,258
|
|
|
|
|
|
27
|
Loans and Leases Charged-off:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
178,429
|
|
|
85,802
|
|
|
16,280
|
|
|
21,540
|
|
|
16,775
|
Real EstateConstruction and Development
|
|
|
998,559
|
|
|
130,272
|
|
|
10,862
|
|
|
68
|
|
|
33
|
Real EstateMortgage and Home Equity
|
|
|
187,888
|
|
|
33,660
|
|
|
11,878
|
|
|
21,147
|
|
|
13,259
|
Personal
|
|
|
27,369
|
|
|
19,724
|
|
|
14,547
|
|
|
15,580
|
|
|
12,821
|
Leases
|
|
|
2,184
|
|
|
1,887
|
|
|
1,863
|
|
|
1,189
|
|
|
7,967
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Charge-offs
|
|
|
1,394,429
|
|
|
271,345
|
|
|
55,430
|
|
|
59,524
|
|
|
50,855
|
Recoveries on Loans and Leases:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
7,506
|
|
|
6,714
|
|
|
6,910
|
|
|
11,758
|
|
|
12,631
|
Real EstateConstruction and Development
|
|
|
12,112
|
|
|
912
|
|
|
82
|
|
|
1
|
|
|
2
|
Real EstateMortgage and Home Equity
|
|
|
4,328
|
|
|
1,964
|
|
|
2,603
|
|
|
2,741
|
|
|
3,887
|
Personal
|
|
|
4,856
|
|
|
3,946
|
|
|
4,247
|
|
|
3,069
|
|
|
3,327
|
Leases
|
|
|
1,786
|
|
|
1,917
|
|
|
2,620
|
|
|
2,819
|
|
|
1,567
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Recoveries
|
|
|
30,588
|
|
|
15,453
|
|
|
16,462
|
|
|
20,388
|
|
|
21,414
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loans and Leases Charged-off
|
|
|
1,363,841
|
|
|
255,892
|
|
|
38,968
|
|
|
39,136
|
|
|
29,441
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for Loan and Lease Losses at End of Year
|
|
$
|
1,202,167
|
|
$
|
496,191
|
|
$
|
420,610
|
|
$
|
363,769
|
|
$
|
358,110
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs
amounted to $1,363.8 million or 2.74% of average loans and leases in 2008 compared to $255.9 million or 0.59% of average loans and leases in 2007 and $39.0 million or 0.10% of average loans and leases in 2006. The increase in net charge-offs in 2008
and 2007 compared to prior years related primarily to the deterioration in the performance of the Corporations real estate loan portfolio. The Corporations construction and development real estate loans exhibited the most dramatic
increase in impairment. In addition, commercial loans whose performance is dependent on the housing market, such as the Franklin loan discussed above, were adversely affected by the deterioration in the national real estate markets.
Deteriorating conditions in the U.S. housing market became evident in the
first half of 2007, accelerated sharply in the second half of the year and continued the accelerated pace in 2008. These deteriorating conditions have been fueled and extended, in part, by rising unemployment due to the recession. As a result, an
increasing number of borrowers have been unable to either refinance or sell their properties and consequently have defaulted or are very close to defaulting on their loans. In this stressed housing market that is experiencing increasing
delinquencies and rapidly declining real estate values, the adequacy of collateral securing the loan becomes a much more important factor in determining expected loan performance. The Corporation continuously re-assessed, and continues to re-assess
the timeliness and propriety of appraisals for collateral dependent loans especially in volatile real estate markets such as Arizona. The Corporation uses a variety of sources, such as recent sales of loans and sales of OREO, to validate the
collateral values used to determine the amount of loss exposure at the measurement date. In addition, the Corporation has re-evaluated and continues to re-evaluate the expected timing and amount of expected cash flows required to service debt under
various scenarios for both nonperforming loans and performing loans considered to be at a higher risk of going into nonperforming status. In many cases, rapidly declining real estate values have resulted in the determination that the collateral was
insufficient to cover the recorded investment in the loan. These factors resulted in the Corporations loan and lease portfolio experiencing significantly higher incidences of default and a significant increase in loss severity in 2008.
44
Net charge-offs in 2008 were concentrated in three areas which the Corporation refers to as business
channels. Net charge-offs for the Arizona business channel amounted to $493.5 million, net charge-offs for the west coast of Florida business channel amounted to $201.7 million and net charge-offs for the correspondent banking business channel
amounted to $240.4 million. The aggregate net charge-offs for these three business channels amounted to $935.6 million or 68.6 % of total net charge-offs for the year ended December 31, 2008. Included in net charge-offs were the net
charge-offs related to the loans that were sold during the twelve months ended December 31, 2008.
As previously discussed, real estate related loans, especially construction and development real estate loans were the primary contributors to the
increase in nonperforming loans and leases and net charge-offs in 2008. Real estate related loans made up the majority of the Corporations nonperforming loans and leases at December 31, 2008. Historically, the Corporations loss
experience with real estate loans has been relatively low due to the sufficiency of the underlying real estate collateral. In a stressed real estate market such as currently exists, the value of the collateral securing the loans has become one of
the most important factors in determining the amount of loss incurred and the appropriate amount of allowance for loan and lease losses to record at the measurement date. The likelihood of losses that are equal to the entire recorded investment for
a real estate loan is remote. However, in many cases, rapidly declining real estate values have resulted in the determination that the estimated value of the collateral was insufficient to cover all of the recorded investment in the loan which has
required significant additional charge-offs. Declining collateral values have significantly contributed to the elevated levels of net charge-offs and the increase in the provision for loan and lease losses that the Corporation experienced in recent
quarters.
The amount of cumulative charge-offs recorded on the
Corporations nonaccrual loans outstanding at December 31, 2008 was approximately $664.1 million or 49.0% of the unpaid principal balance of the affected nonaccrual loans and 30.3% of the unpaid principal balance of its total nonaccrual
loans outstanding at December 31, 2008. These charge-offs have reduced the carrying value of these nonaccrual loans and leases which reduced the allowance for loan and lease losses required at the measurement date.
Consistent with the credit quality trends noted above, the provision for loan
and lease losses amounted to $2,037.7 million in 2008. By comparison, the provision for loan and lease losses amounted to $319.8 million and $50.6 million in 2007 and 2006, respectively. The provision for loan and lease losses is the amount required
to establish the allowance for loan and lease losses at the required level after considering charge-offs and recoveries. The ratio of the allowance for loan and lease losses to total loans and leases was 2.41% at December 31, 2008 compared to
1.07% at December 31, 2007 and 1.00% at December 31, 2006.
The following table presents the allocation of the consolidated allowance for loan and lease losses at December 31, 2008, as well as selected comparative years:
Allocation of the Allowance for Loan and Lease Losses ($000s)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
December 31, 2007
|
|
|
December 31, 2006
|
|
|
|
Amount
|
|
Percent of
Loans and
Leases to
Total Loans
and Leases
|
|
|
Amount
|
|
Percent of
Loans and
Leases to
Total Loans
and Leases
|
|
|
Amount
|
|
Percent of
Loans and
Leases to
Total Loans
and Leases
|
|
Balance at end of period applicable to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial, Financial & Agricultural
|
|
$
|
183,194
|
|
29.8
|
%
|
|
$
|
205,258
|
|
29.8
|
%
|
|
$
|
251,475
|
|
28.7
|
%
|
Real Estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential Mortgage
|
|
|
599,882
|
|
29.6
|
|
|
|
46,755
|
|
30.6
|
|
|
|
20,454
|
|
31.9
|
|
Commercial Mortgage
|
|
|
364,723
|
|
35.2
|
|
|
|
185,601
|
|
34.7
|
|
|
|
83,510
|
|
34.2
|
|
Personal
|
|
|
46,716
|
|
3.9
|
|
|
|
26,889
|
|
3.3
|
|
|
|
18,434
|
|
3.5
|
|
Lease Financing
|
|
|
7,652
|
|
1.5
|
|
|
|
31,688
|
|
1.6
|
|
|
|
46,737
|
|
1.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,202,167
|
|
100.0
|
%
|
|
$
|
496,191
|
|
100.0
|
%
|
|
$
|
420,610
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005
|
|
|
December 31, 2004
|
|
|
|
Amount
|
|
Percent of
Loans and
Leases to
Total Loans
and Leases
|
|
|
Amount
|
|
Percent of
Loans and
Leases to
Total Loans
and Leases
|
|
Balance at end of period applicable to:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial, Financial & Agricultural
|
|
$
|
222,078
|
|
28.0
|
%
|
|
$
|
244,042
|
|
28.7
|
%
|
Real Estate
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential Mortgage
|
|
|
12,921
|
|
34.9
|
|
|
|
12,311
|
|
32.6
|
|
Commercial Mortgage
|
|
|
63,813
|
|
30.5
|
|
|
|
49,965
|
|
31.7
|
|
Personal
|
|
|
24,153
|
|
4.7
|
|
|
|
14,252
|
|
5.2
|
|
Lease Financing
|
|
|
40,804
|
|
1.9
|
|
|
|
37,540
|
|
1.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
363,769
|
|
100.0
|
%
|
|
$
|
358,110
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management expects
prevailing economic and national housing market conditions to continue in 2009, possibly extending into 2010. The level of net charge-offs and the recorded allowance for loan and lease losses are based on managements best estimate of the
losses incurred at the measurement date. Management recognizes there are significant estimates in the process and the ultimate losses could be significantly different from those currently estimated. Management expects the provision for loan and
lease losses will continue to be higher than its pre-2007 historical experience. Rapidly changing collateral values, general economic conditions and numerous other factors continue to create volatility in the housing markets and have increased the
possibility that additional losses may have to be recognized with respect to the Corporations current loan and lease portfolio. In addition, further deterioration in the economy and national housing markets would likely result in an increase
in the amount of nonperforming assets, net charge-offs and provisions for loan and lease losses reported in future quarters. Due to the uncertainty caused by the recession, the crisis in the national real estate markets and numerous other unknown
factors that will ultimately affect the timing and amount of nonperforming assets, net charge-offs and the provision for loan and lease losses, it is difficult to develop reliable expectations about nonperforming assets, net charge-offs and
provisions for loan and lease losses that will be recognized in 2009.
The Corporation will continue to proactively manage its problem loans and nonperforming assets and be aggressive to isolate, identify and assess its underlying loan and lease portfolio credit quality. The Corporation has developed and
continues to develop strategies, such as selective sales of nonperforming loans and restructuring loans to qualified borrowers, to mitigate its loss exposure. Construction and development loans tend to be more complex and may take more time to
attain a satisfactory resolution. Depending on the facts and circumstances, acquiring real estate collateral in partial or total satisfaction of problem loans may continue to be the best course of action to take in order to mitigate the
Corporations exposure to loss.
Other Income
Total other income amounted to $748.1 million in 2008
compared to $729.1 million in 2007, an increase of $19.0 million or 2.6%. Total other income in 2008 was positively impacted by revenues from acquisitions, OREO income, organic fee growth in wealth management revenue and service charges on deposits,
but was negatively impacted by lower mortgage banking revenues and a write-down on the cash surrender value of a bank-owned life insurance policy. Lower net investment securities gains in 2008 compared to 2007 were offset by the gain recorded on the
termination of debt in 2008. Total other income in 2007 was positively impacted by gains from the sale of branches, interest rate swap terminations and a small favorable litigation settlement. The Corporation estimates that its organic growth in
total other income in 2008 compared to 2007 was approximately $42.7 million or 6.6%.
Wealth management revenue was $282.2 million in 2008 compared to $262.8 million in 2007, an increase of $19.4 million or 7.4%. A full year of revenue attributable to the April 20, 2007 acquisition of North Star
Financial Corporation and revenue from the December 3, 2008 acquisition of a majority equity interest in TCH contributed approximately $3.7 million to the growth in wealth management revenue in 2008 compared to 2007. Assets under management
(AUM) were $30.4 billion at December 31, 2008 compared to $25.7 billion at December 31, 2007, an increase of $4.7 billion or 18.3%. Assets under administration (AUA) decreased by $1.3 billion or 1.2% and
46
amounted to $104.4 billion at December 31, 2008 compared to $105.7 billion at December 31, 2007. Both AUM and AUA at December 31, 2008 include
the impact of the TCH acquisition which contributed $7.3 billion to the reported AUM and AUA at year-end 2008. Average AUM for the year ended December 31, 2008 excluding TCH was relatively unchanged compared to average AUM for the year ended
December 31, 2007. Average AUA for the year ended December 31, 2008 excluding TCH was also relatively unchanged compared to average AUA for the same period in 2007. Excluding TCH, the contraction in period-end AUM and AUA reflects the
effect of certain expected balance drawdowns as well as the impact of the downturn in the equity markets. The market environment resulted in slower revenue growth. However, sales and pipelines have remained stable. Revenue from operations
outsourcing services and securities lending continued to grow in 2008. Revenue from operations outsourcing is expected to continue to expand as sales and pipeline opportunities remain strong. The Corporation expects to continue to attract assets for
management and administration through increased sales and completion of the integration of TCH. Wealth management revenue is affected by market volatility and direction. The uncertainty that currently exists in the markets makes it difficult to make
an estimate of wealth management revenue in 2009.
Service
charges on deposits amounted to $146.2 million in 2008 compared to $120.6 million in 2007, an increase of $25.6 million or 21.2%. The banking acquisitions contributed $16.8 million to the growth in service charges on deposits in 2008 compared to
2007. A portion of this source of fee income is sensitive to changes in interest rates. In a declining rate environment, customers that pay for services by maintaining eligible deposit balances receive a lower earnings credit that results in higher
fee income. Excluding the effect of the banking acquisitions, higher service charges on deposits associated with commercial demand deposits accounted for the majority of the increase in revenue in 2008 compared to 2007.
Total mortgage banking revenue was $26.0 million in 2008 compared with $34.1
million in 2007, a decrease of $8.1 million or 23.6%. During 2008, the Corporation sold $1.4 billion of residential mortgage and home equity loans to the secondary market. During 2007, the Corporation sold $1.8 billion of residential mortgage and
home equity loans to the secondary market. The retained interests in the form of mortgage servicing rights in 2008 and 2007 were not material and at December 31, 2008, the carrying value of mortgage servicing rights was insignificant.
Net investment securities gains amounted to $17.2 million in
2008 compared to $34.8 million in 2007. During 2008, in conjunction with the Visa IPO, 38.7% of the Class B Visa common stock owned by the Corporation was redeemed. The gain from the redemption amounted to $26.9 million. During 2008, the Corporation
recognized an other than temporary loss on an investment in a small-business lending venture. That loss amounted to $10.0 million. During 2007, the Corporation sold its investment in MasterCard Class B common shares at a gain of $19.0 million and
sold other equity securities at a gain of $7.2 million. The Corporation sold these equity securities in order to monetize the significant appreciation in market price of the securities over the period in which they were held. During 2007, the
Corporation also sold $672.9 million of government agency investment securities designated as available for sale at a gain of $4.3 million. Net gains associated with the Corporations private equity investments amounted to $2.8 million in 2008
and $7.6 million in 2007. Other than temporary impairment on the residual interests held in the form of interest-only strips associated with the Corporations auto securitization activities resulted in a loss of $1.7 million in 2008 and $1.9
million in 2007.
BOLI revenue amounted to $35.9 million in
2008 compared to $37.7 million in 2007, a decrease of $1.8 million or 4.8%. During the second half of 2007, the Corporation purchased $286.6 million of additional bank-owned life insurance. That purchase along with bank-owned life insurance acquired
in the banking acquisitions increased bank-owned life insurance revenue in 2008 compared to 2007 by approximately $10.0 million.
The Corporation purchases BOLI policies on the lives of certain officers and employees and is the owner and beneficiary of the policies. The Corporation
invests in these BOLI policies to provide an efficient form of funding for long-term retirement and other employee benefits costs. Therefore, the Corporations BOLI policies are intended to be long-term investments to provide funding for future
payment of long-term liabilities. The Corporation records these BOLI policies at each policys respective cash surrender value, with changes recorded in Bank-Owned Life Insurance Revenue in the Consolidated Statements of Income.
Certain BOLI policies have a stable value agreement through either a large,
well-rated bank or multi-national insurance carrier that provides limited cash surrender value protection from declines in the value of each policys underlying investments. During the fourth quarter of 2008, the value of the investments
underlying one of the
47
Corporations BOLI policies declined significantly due to disruptions in the credit markets, widening of credit spreads and illiquidity in the
securities market. These factors caused the decline in the cash surrender value to exceed the protection provided by the stable value agreement. As a result of exceeding the cash surrender value protection, the Corporation recorded a loss of $11.8
million to reflect the change in cash surrender value related to the affected BOLI policy. The cash surrender value of this BOLI policy was $238.3 million at December 31, 2008. The cash surrender value of this policy may increase or decrease
further depending on market conditions related to the underlying investments. At December 31, 2008, the cash surrender value protection had not been exceeded for any other BOLI policies.
Gain on the termination of debt amounted to $14.7 million in 2008. During
2008, the Corporation re-acquired and extinguished $169.2 million of debt. The debt consisted of small blocks of various bank notes issued by M&I Bank. The size of the blocks ranged from $1.9 million to $50.0 million with a weighted average
buyback price of approximately 91.0% of par.
OREO income
primarily consists of gains from the sale of OREO and amounted to $9.0 million in 2008 compared to $1.5 million in 2007, an increase of $7.5 million. The carrying value of OREO properties sold amounted to $93.2 million in 2008 compared to $34.7
million in 2007.
Other noninterest income amounted to $216.9
million in 2008 compared to $237.5 million in 2007, a decrease of $20.6 million or 8.7%. During 2007, the Corporation sold its three branches in the Tulsa, Oklahoma market at a gain of $29.0 million. As previously discussed, $370.0 million of
floating rate FHLB advances were extinguished and the pay fixed / receive floating interest rate swaps that were designated as cash flow hedges on the FHLB advances were terminated in 2007. The gain realized from these transactions was primarily due
to the acceleration of the fair value adjustments for the interest rate swaps that were recorded in other comprehensive income and amounted to $5.3 million. Other income for 2007 also included gains resulting from a favorable lawsuit settlement that
in total amounted to $1.8 million. A final settlement for three branches in Tulsa, Oklahoma that were sold in the fourth quarter of 2007 resulted in additional gain of $2.4 million in 2008. Increased fees and income from the banking acquisitions as
well as organic growth in a variety of sources of fees and income, especially trading income and card-related fees, were offset by lower auto securitization revenues and the loss of service fee revenue charged to Metavante in 2007. The banking
acquisitions contributed an additional $3.2 million to other noninterest income in 2008 compared to 2007. Card-related fees (credit, debit, ATM and stored value) increased $11.5 million in 2008 compared to 2007. Trading and investment commissions
and fees increased other noninterest income by $19.1 million in 2008 compared to 2007.
Total other income amounted to $729.1 million in 2007 compared to $581.7 million in 2006. As previously discussed, total other income in 2006 includes a loss of $18.4 million from applying fair value accounting
(versus hedge accounting) to interest rate swaps associated with transactions that did not qualify for hedge accounting. Excluding that loss, total other income amounted to $600.1 million in 2006 and the increase in total other income in 2007
compared to 2006 was $129.0 million or 21.5%. Wealth management revenue was a significant contributor to the growth in other income in 2007 compared to 2006. Gains from the sale of branches and investment securities gains offset lower mortgage
banking revenue in 2007 compared to 2006.
Wealth management
revenue was $262.8 million in 2007 compared to $221.6 million in 2006, an increase of $41.2 million or 18.6%. Wealth management revenue attributable to the April 20, 2007 acquisition of North Star Financial Corporation and a full year of
revenue attributable to the April 1, 2006 acquisition of wealth management products and services from Gold Banc Corporation, Inc. (Gold Banc) contributed approximately $5.0 million to the growth in wealth management revenue in 2007
compared to 2006. Continued success in the 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 in 2006 and 2007. Assets under management were $25.7 billion at December 31, 2007 compared to $22.5 billion at December 31, 2006, an increase of $3.2 billion or 14.2%. Assets under administration increased by $10.2
billion or 10.7% and amounted to $105.7 billion at December 31, 2007.
Service charges on deposits amounted to $120.6 million in 2007 compared to $106.7 million in 2006, an increase of $13.9 million or 13.0%. The banking acquisitions contributed $3.3 million to the growth in service
charges on deposits in 2007 compared to 2006. A portion of this source of fee income is sensitive to changes in interest rates. In a declining rate environment, customers that pay for services by maintaining eligible deposit balances receive a lower
48
earnings credit that results in higher fee income. Excluding the effect of the banking acquisitions, higher service charges on deposits associated with
commercial demand deposits accounted for the majority of the increase in revenue in 2007 compared to 2006.
Total mortgage banking revenue was $34.1 million in 2007 compared with $52.4 million in 2006, a decrease of $18.3 million or 35.0%. During 2007, the
Corporation sold $1.8 billion of residential mortgage and home equity loans to the secondary market. During 2006, the Corporation sold $2.3 billion of loans to the secondary market. The retained interests in the form of mortgage servicing rights in
2007 and 2006 were not material and at December 31, 2007, the carrying value of mortgage servicing rights was insignificant.
Net investment securities gains amounted to $34.8 million in 2007 compared to $9.7 million in 2006. Net gains associated with the Corporations
private equity investments amounted to $7.6 million in 2007 compared to $4.6 million in 2006. During 2007, the Corporation sold its investment in MasterCard Class B common shares at a gain of $19.0 million and sold other equity securities at a gain
of $7.2 million. The Corporation sold these equity securities in order to monetize the significant appreciation in market price of the securities over the period in which they were held. During 2007, the Corporation also sold $672.9 million of
government agency investment securities designated as available for sale at a gain of $4.3 million. No individual available for sale investment security sold was temporarily impaired at the time of sale. Other than temporary impairment on the
residual interests held in the form of interest-only strips associated with the Corporations auto securitization activities resulted in a loss of $1.9 million in 2007.
BOLI revenue amounted to $37.7 million in 2007 compared to $29.1 million in 2006, an increase of $8.6 million or 29.6%.
During the second half of 2007, the Corporation purchased $286.6 million of additional BOLI. That purchase, along with BOLI acquired in the banking acquisitions, were the primary contributors to the increase in life insurance revenue in 2007
compared to 2006.
OREO income primarily consists of gains from
the sale of OREO and amounted to $1.5 million in 2007 compared to $1.6 million in 2006.
Other noninterest income amounted to $237.5 million in 2007 compared to $179.0 million in 2006, an increase of $58.5 million or 32.7%. During 2007, the Corporation sold its three branches in the Tulsa, Oklahoma market
at a gain of $29.0 million. As previously discussed, during 2007 $370.0 million of floating rate FHLB advances were extinguished and the pay fixed / receive floating interest rate swaps that were designated as cash flow hedges on the FHLB advances
were terminated. The gain realized from these transactions was primarily due to the acceleration of the fair value adjustments for the interest rate swaps that were recorded in other comprehensive income and amounted to $5.3 million. The banking
acquisitions contributed approximately $2.1 million to the year-over-year growth in other noninterest income. Card-related fees (credit, debit, ATM and stored value) increased $8.2 million in 2007 compared to 2006. Trading and investment commissions
and fees increased other noninterest income by $11.0 million in 2007 compared to 2006.
Other Expense
Total
other expense amounted to $2,994.1 million in 2008 compared to $1,314.9 million in 2007, an increase of $1,679.2 million or 127.7%.
Total other expense in 2008 included $1,604.2 million of expenses that constituted the majority of this increase. Goodwill impairment accounted for
$1,535.1 million of the increase in other expense. Market disruptions resulted in unexpected losses and charges in the Corporations Wealth Management segment that amounted to $45.7 million for the year ended December 31, 2008. During
2008, the Corporation incurred increased provisions for loss exposures associated with unfunded loan commitments and other credit-related liabilities that amounted to $22.0 million for the year ended December 31, 2008. As a result of higher gas
prices earlier in the year, total other expense in 2008 included residual write-downs of $4.9 million associated with direct financing consumer vehicle leases. During the fourth quarter of 2008 the Corporation recorded $8.7 million for severance
expense associated with a corporate-wide reduction in force. During 2008, Visa established an escrow for certain litigation matters from the proceeds of its IPO. As a result, the Corporation reversed part of its litigation accruals that were
originally recorded in 2007 due to the Corporations membership interests in Visa. The amount reversed was equal to the Corporations pro rata share of the funded escrow. Included in total other expense in 2008 is the reversal of $12.2
million related to the Visa litigation matters.
49
Throughout 2008, the Corporation experienced elevated levels of operating expenses due to the increase in
expense associated with collection efforts and carrying nonperforming assets. The Corporation estimates that the increase in expense associated with collection efforts and carrying nonperforming assets amounted to $92.7 million in 2008 compared to
2007.
Total other expense in 2008 included the operating
expenses associated with the banking and wealth management acquisitions completed in 2008 and 2007 which the Corporation collectively refers to as the acquisitions. The operating expenses of the acquired entities have been included in
the Corporations consolidated operating expenses from the dates the transactions were completed. Approximately $55.8 million of the operating expense growth in 2008 compared to 2007 were attributable to the acquisitions.
Total other expense in 2007 includes losses on debt terminations of $83.7
million, charitable contribution expense of $25.0 million and loss accruals associated with the Visa litigation of $25.8 million which in the aggregate amounted to $134.5 million.
The Corporation estimates that its expense growth in 2008 compared to 2007, excluding the effect of the items previously
discussed was approximately $61.0 million or 5.4%.
Expense
control is sometimes measured in the financial services industry by the efficiency ratio statistic. The efficiency ratio is calculated by dividing total other expense by the sum of total other income (including private equity-related investment
gains but excluding other securities gains and losses and excluding derivative losses-discontinued hedges) and net interest income FTE. The Corporations efficiency ratios for the years ended December 31, 2008, 2007, and 2006 were:
Efficiency Ratios
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Consolidated Corporation
|
|
117.8
|
%
|
|
56.0
|
%
|
|
50.8
|
%
|
The Corporations
2008 efficiency ratio statistic was adversely impacted by the goodwill impairment, unexpected losses and charges in the Corporations Wealth Management segment, increased provisions for loss exposures associated with unfunded loan commitments
and other credit-related liabilities, the residual write-downs, severance expense and the previously discussed BOLI loss. Conversely, the Corporations 2008 efficiency ratio statistic was positively impacted by the previously discussed gains on
termination of debt and reversal of part of the Corporations Visa litigation accruals. The net effect of these items was to increase the Corporations 2008 efficiency ratio statistic by approximately 63.1%.
The Corporations 2007 efficiency ratio statistic was adversely impacted
by the losses on debt terminations, charitable contribution expense and loss accruals associated with the Visa litigation. Conversely, the Corporations 2007 efficiency ratio statistic was positively impacted by the divestiture of three
branches in the Tulsa, Oklahoma market that were sold at a gain of $29.0 million. The net effect of these items was to increase the Corporations 2007 efficiency ratio statistic by approximately 4.9%.
The Corporation estimates that the operating expenses associated with
collection efforts and carrying nonperforming assets, net of OREO income, increased the Corporations 2008 efficiency ratio statistic by approximately 4.2%. By comparison, the operating expenses associated with collection efforts and carrying
nonperforming assets, net of OREO income, increased the Corporations 2007 efficiency ratio statistic by approximately 0.8%.
Salaries and employee benefits expense amounted to $723.2 million in 2008 compared to $659.9 million in 2007, an increase of $63.3 million or 9.6%.
Salaries and benefits expense related to the acquisitions contributed approximately $26.7 million to the expense growth in 2008 compared to 2007. Salaries and employee benefits expense associated with collection efforts increased $6.3 million in
2008 compared to 2007. Severance expense associated with a corporate-wide reduction in force increased salaries and employee benefits expense $8.7 million in 2008 compared to 2007. Salaries and employee benefits expense for incentive commissions and
incentive compensation decreased $15.6 million in 2008 compared to 2007.
50
Net occupancy and equipment expense amounted to $126.9 million in 2008 compared to $112.0 million in
2007, an increase of $14.9 million or 13.3%. Net occupancy and equipment expense related to the acquisitions contributed approximately $9.1 million to the expense growth in 2008 compared to 2007. During 2008, the Corporation opened 15 new de novo
branches throughout its markets.
Software and processing
expenses amounted to $156.7 million in 2008 compared to $156.2 million in 2007, an increase of $0.5 million or 0.3%. Processing expense related to the acquisitions contributed approximately $1.4 million to the expense growth in 2008 compared to
2007.
Supplies, printing, postage and delivery expense
amounted to $42.1 million in 2008 compared to $42.5 million in 2007, a decrease of $0.4 million or 1.0%.
Professional services fees amounted to $72.0 million in 2008 compared to $42.5 million in 2007, an increase of $29.5 million or 69.7%. The acquisitions
contributed approximately $1.3 million to the expense growth in 2008 compared to 2007. Increased legal fees and other fees associated with problem loans contributed approximately $11.7 million to the expense growth in 2008 compared to 2007. Other
professional fees associated with consulting also contributed to the increase in professional services fees in 2008 compared to 2007.
Amortization of intangibles amounted to $24.3 million in 2008 compared to $20.6 million in 2007. Amortization of intangibles increased $3.7 million in
2008 compared to 2007. The increase in intangibles amortization was due to the acquisitions.
As a result of the unprecedented weakness in the financial markets and the decline in the Corporations common stock price, numerous tests for goodwill impairment were performed throughout 2008. The results of
goodwill impairment testing at the end of the fourth quarter of 2008 indicated that the fair value of certain of the Corporations Reporting Units were less than their book values, resulting in a non-cash charge to pre-tax earnings for goodwill
impairment in the amount of $1,535.1 million. Tier 1 and Total regulatory capital ratios were unaffected by this adjustment.
Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets
, (SFAS 142) adopts an aggregate
view of goodwill and bases the accounting for goodwill on the units of the combined entity into which an acquired entity is integrated (which are referred to as Reporting Units). A Reporting Unit is an operating segment as defined in
Statement of Financial Accounting Standards No. 131,
Disclosures about Segments of an Enterprise and Related Information
,
or one level below an operating segment.
SFAS 142 provides guidance for impairment testing of goodwill and intangible
assets that are not amortized. Other than goodwill, the Corporation does not have any other intangible assets that are not amortized. Goodwill is tested for impairment using a two-step process that begins with an estimation of the fair value of a
Reporting Unit. The first step is a screen for potential impairment and the second step measures the amount of impairment, if any. Based on the test performed at the end of the fourth quarter of 2008, the Wealth Management segment, which consists of
the Trust, Private Banking and Brokerage Reporting Units, and the Capital Markets Reporting Unit did not have indicators of potential impairment based on the estimated fair value of those Reporting Units.
Based on their estimated fair values, the Commercial and Community Banking
segments and the National Consumer Banking Reporting Unit had indicators of potential impairment and were subjected to the second step of goodwill impairment testing. The deterioration in the national real estate markets, the economic recession and
the disruption in the capital markets had the greatest adverse affect on these segments and Reporting Units. As a result of applying the second step of the test, the National Consumer Banking Reporting Unit had no goodwill impairment, the Commercial
Banking segment recorded goodwill impairment of $925.6 million and the Community Banking segment recorded goodwill impairment of $609.5 million.
Losses on termination of debt amounted to $83.7 million in 2007. During 2007, the Corporation called the $200 million 7.65% junior subordinated deferrable
interest debentures and the related M&I Capital Trust A 7.65% trust preferred securities. The loss, which was primarily due to the contractual call premium, amounted to $9.5 million. The Corporation also terminated $1,000 million PURS in 2007.
The loss, which was primarily the cost of purchasing the right to remarket the PURS through 2016, amounted to $74.2 million.
51
OREO expenses amounted to $83.2 million in 2008 compared to $8.2 million in 2007, an increase of $75.0
million. Approximately $57.1 million of the increase in 2008 compared to 2007 is due to valuation write-downs and losses on disposition which reflects both the increased levels of foreclosed properties and the rapid decline in real estate values
during 2008. Approximately $17.9 million of the increase in 2008 compared to 2007 reflects the costs of acquiring and holding the increased levels of foreclosed properties. The Corporation expects higher levels of expenses associated with acquiring
and holding foreclosed properties will continue in future quarters. Valuation write-downs and losses on disposition will depend on real estate market conditions.
Other noninterest expense amounted to $230.5 million in 2008 compared to $189.5 million in 2007, an increase of $41.0
million or 21.6%.
Other noninterest expense in 2008 included
the impact of the financial market disruption during the year. The market disruption resulted in unexpected losses and charges in the Corporations Wealth Management segment that increased other expense by $45.7 million in 2008 compared to
2007. The Lehman Brothers bankruptcy in the third quarter of 2008 resulted in losses from a failed securities lending transaction and other than temporary impairment on investments in Lehman Brothers debt securities that are subject to credit
support agreements issued by M&I Trust and the Corporation.
Other noninterest expense in 2008 compared to 2007 increased $22.0 million due to increased provisions for losses associated with unfunded loan commitments and other credit-related liabilities. Historically, the Corporations loss
exposure with respect to these items has been relatively low. The credit evaluation of the customer, collateral requirements and the ability to access collateral is generally similar to that for loans. Many customers have been directly or indirectly
affected by the stress and deterioration of the national real estate markets. For many of the same reasons previously discussed under the section entitled Provision for Loan and Lease Losses and Credit Quality in this Form 10-K, these loss exposures
have also increased, which is consistent with the Corporations recent experience with its loan credit exposures.
Total other noninterest expense in 2008 included residual write-downs of $4.9 million associated with direct financial leases of SUVs and pick-up trucks.
Other noninterest expense in 2008 includes the reversal of
$12.2 million related to the Visa litigation compared to a Visa loss accrual recorded in 2007 in the amount of $25.8 million. The Visa litigation is discussed in Note 24 Guarantees in Notes to Consolidated Financial Statements contained in
Item 8, Consolidated Financial Statements and Supplementary Data.
The acquisitions contributed approximately $9.9 million to the growth in other noninterest expense in 2008 compared to 2007. Included in other noninterest expense in 2007 was a $25.0 million charitable contribution.
Other noninterest expense adjusted for the items previously discussed
amounted to $158.5 million in 2008 compared to $137.0 million in 2007, an increase of $21.5 million or 15.7%. Deposit insurance premiums increased $13.3 million in 2008 compared to 2007.
On December 16, 2008, the Federal Deposit Insurance Corporation (FDIC) released Financial Institution
Letter 143-2008 to announce that it had approved a final rule to uniformly increase the deposit insurance assessment rates for the first quarter of 2009. The rule raises the assessment rates by an annualized rate of 7 basis points for the assessment
period only in the first quarter of 2009. Annual rates applicable to the first quarter 2009 assessments, which would be collected at the end of June, will be based on the risk category of the institution and range from 12 to 50 basis points.
Total other expense amounted to $1,314.9 million in 2007
compared to $1,083.5 million in 2006, an increase of $231.4 million or 21.4%. Total other expense in 2007 includes losses on debt terminations of $83.7 million, charitable contribution expense of $25.0 million and loss accruals associated with the
Visa litigation of $25.8 million. These items accounted for $134.5 million of the expense growth in 2007 compared to 2006.
Salaries and employee benefits expense amounted to $659.9 million in 2007 compared to $613.4 million in 2006, an increase of $46.5 million or 7.6%.
Salaries and benefits expense related to the acquisitions contributed approximately $25.7 million to the expense growth in 2007 compared to 2006.
52
Net occupancy and equipment expense amounted to $112.0 million in 2007 compared to $104.0 million in
2006, an increase of $8.0 million. Net occupancy and equipment expense related to the acquisitions contributed approximately $4.1 million to the expense growth in 2007 compared to 2006.
Software and processing expenses amounted to $156.2 million in 2007 compared to $142.3 million in 2006, an increase of $13.9
million or 9.8%. Increased volumes of processing associated with the acquisitions along with increased expense associated with new and enhanced commercial and consumer internet banking and deposit system applications as well as other technology
enhancements and reduced useful lives associated with lockbox and image software accounted for the increase in software and processing expenses in 2007 compared to 2006.
Supplies, printing, postage and delivery expense amounted to $42.5 million in 2007 compared to $41.3 million in 2006, an increase of $1.2
million or 3.0%. The acquisitions contributed approximately $0.5 million to the expense growth in 2007 compared to 2006.
Professional services fees amounted to $42.5 million in 2007 compared to $34.1 million in 2006, an increase of $8.4 million or 24.6%. The acquisitions
contributed approximately $2.3 million to the expense growth in 2007 compared to 2006. Increased legal fees associated with problem loans and increased other professional fees associated with process improvement and customer security consulting also
contributed to the increase in professional services fees in 2007 compared to 2006.
Amortization of intangibles amounted to $20.6 million in 2007 compared to $18.6 million in 2006. Amortization of intangibles increased $3.2 million in 2007 compared to 2006 due to the acquisitions.
Losses on termination of debt amounted to $83.7 million in 2007. During 2007,
the Corporation called the $200 million 7.65% junior subordinated deferrable interest debentures and the related M&I Capital Trust A 7.65% trust preferred securities. The loss, which was primarily due to the contractual call premium, amounted to
$9.5 million. The Corporation also terminated $1,000 million PURS in 2007. The loss, which was primarily the cost of purchasing the right to remarket the PURS through 2016, amounted to $74.2 million.
OREO expenses amounted to $8.2 million in 2007 compared to $3.3 million in
2006, an increase of $4.9 million. Approximately $3.3 million of the increase in 2007 compared to 2006 reflects the costs of acquiring and holding the increased levels of foreclosed properties. Approximately $1.6 million of the increase in 2007
compared to 2006 is due to valuation write-downs and losses on disposition.
Other noninterest expense amounted to $189.5 million in 2007 compared to $126.6 million in 2006, an increase of $62.9 million or 49.7%. Included in other noninterest expense in 2007 was the $25.0 million charitable
contribution and the Visa loss accrual in the amount of $25.8 million, as previously discussed. The acquisitions contributed approximately $5.9 million to the growth in other noninterest expense in 2007 compared to 2006.
Income Tax Provision
The benefit for income taxes amounted to $459.5 million or 18.4% of the
pre-tax loss for the year ended December 31, 2008. The provision for income taxes from continuing operations was $213.6 million in 2007 and $307.4 million in 2006. The effective tax rate in 2007 was 30.1% and 32.2% in 2006.
As a result of the Internal Revenue Services (IRS) decision
not to appeal a November 2007 US Tax Court ruling related to how the TEFRA (interest expense) disallowance should be calculated within a consolidated group and the position the IRS has taken in another related case, the Corporation recognized an
additional income tax benefit related to years 1996-2007 of $20.0 million for its similar issue during 2008.
The effective tax rate in 2007 reflects, in part, the effect of the increase in tax-exempt income, primarily life insurance revenue, as previously
discussed and increased tax benefits from programs and activities that are eligible for federal income tax credits. Some of these programs and activities provide annual tax benefits in the form of federal income tax credits in future periods as long
as the programs and activities continue to qualify under the federal tax regulations.
53
Liquidity and Capital Resources
Shareholders equity was $6.3 billion or 10.0% of total consolidated assets at December 31, 2008, compared to $7.0
billion or 11.8% of total consolidated assets at December 31, 2007.
As one of the steps to preserve its strong capital base, the Corporation recently announced that it would reduce the quarterly common stock cash dividend to $0.01 per share.
Shareholders equity at December 31, 2008 includes the effect of
certain common stock issuances during the current year. In 2008, the Corporation issued 4,863,221 shares of the Corporations common stock valued at $64.0 million, or $13.16 per share to acquire a majority equity interest in Taplin,
Canida & Habacht, Inc. During 2008, the Corporation issued 579,111 shares of its common stock for $8.5 million to fund its obligation under its employee stock purchase plan.
Shareholders equity at December 31, 2007 includes the effect of certain common stock issuances during the year.
In 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. During 2007, the Corporation issued 4,410,647 shares of its common stock
and exchanged fully vested stock options to purchase its common stock with a total value of $219.6 million in connection with the Corporations acquisition of United Heritage Bankshares of Florida, Inc. Also during 2007, the Corporation issued
441,252 shares of its common stock with a total value of $21.0 million in connection with the Corporations acquisition of North Star Financial Corporation. During 2007, the Corporation remarketed the 3.90% STACKS of M&I Capital Trust B
that were originally issued in 2004 as components of the Corporations 6.50% Common SPACES. In connection with the remarketing, the annual interest rate on the remarketed STACKS was reset at 5.626%, M&I Capital Trust B was liquidated and
the Corporation issued $400 million of 5.626% senior notes that mature on August 17, 2009 in exchange for the outstanding STACKS. Each Common SPACES also included a stock purchase contract requiring the holder to purchase, in accordance with a
settlement rate formula, shares of the Corporations common stock. The Corporation issued 9,226,951 shares of its common stock in settlement of the stock purchase contracts in exchange for $400 million in cash.
On November 14, 2008, as part of the Corporations participation in
the CPP, the Corporation entered into a Letter Agreement with the UST. Pursuant to the Securities Purchase Agreement Standard Terms (the Securities Purchase Agreement) attached to the Letter Agreement, the Corporation sold
1,715,000 shares of the Corporations Senior Preferred Stock, Series B (the Senior Preferred Stock), having a liquidation preference of $1,000 per share, for a total price of $1,715 million. The Senior Preferred Stock will qualify
as Tier 1 capital and pay cumulative compounding dividends at a rate of 5% per year for the first five years and 9% per year thereafter.
The Securities Purchase Agreement provided that the Corporation may not redeem the Senior Preferred Stock during the first three years except with the
proceeds from one or more Qualified Equity Offerings (as defined in the Securities Purchase Agreement), and that after three years, the Corporation may redeem shares of the Senior Preferred Stock for the per share liquidation preference
of $1,000 plus any accrued and unpaid dividends. Pursuant to the ARRA, which was signed into law in February 2009, CPP participants are permitted to repay assistance received under the CPP at any time, subject to consultation with the appropriate
federal banking agency. However, the Corporations Restated Articles of Incorporation contain the redemption restrictions contained in the Securities Purchase Agreement. The Corporation may seek to amend the Restated Articles of Incorporation
in the future to remove the restrictions in accordance with the ARRA.
As long as any Senior Preferred Stock is outstanding, the Corporation may pay quarterly common stock cash dividends of up to $0.32 per share, and may redeem or repurchase its common stock, provided that all accrued and unpaid dividends for
all past dividend periods on the Senior Preferred Stock are fully paid. Prior to the third anniversary of the USTs purchase of the Senior Preferred Stock, unless Senior Preferred Stock has been redeemed or the UST has transferred all of the
Senior Preferred Stock to third parties, the consent of the UST will be required for the Corporation to increase its common stock dividend to more than $0.32 per share per quarter or repurchase its common stock or other equity or capital securities,
other than in connection with benefit plans consistent with past practice and certain other circumstances specified in the Securities Purchase Agreement. As previously described, the Corporation recently reduced its quarterly common stock cash
dividend to $0.01 per share. The Senior Preferred Stock will be non-voting except for class voting rights on matters that would adversely affect the rights of the holders of the Senior Preferred Stock.
54
As a condition to participating in the CPP, the Corporation issued and sold to the UST a warrant (the
Warrant) to purchase 13,815,789 shares (the Warrant Shares) of the Corporations common stock, at an initial per share exercise price of $18.62, for an aggregate purchase price of approximately $257.25 million. The term
of the Warrant is ten years. The Warrant will not be subject to any contractual restrictions on transfer, provided that the UST may only transfer a portion or portions of the Warrant with respect to, or exercise the Warrant for, more than one-half
of the initial Warrant Shares prior to the earlier of (a) the date on which the Corporation has received aggregate gross proceeds of at least $1,715 million from one or more Qualified Equity Offerings, (b) December 31, 2009. If the
Corporation completes one or more Qualified Equity Offerings on or prior to December 31, 2009 that result in the Corporation receiving aggregate gross proceeds equal to at least $1,715 million, then the number of Warrant Shares will be reduced
to 50% of the original number of Warrant Shares. The Warrant provides for the adjustment of the exercise price and the number of Warrant Shares issuable upon exercise pursuant to customary anti-dilution provisions, such as upon stock splits or
distributions of securities or other assets to holders of the Corporations common stock, and upon certain issuances of the Corporations common stock at or below a specified price range relative to the initial exercise price. Pursuant to
the Securities Purchase Agreement, the UST has agreed not to exercise voting power with respect to any shares of common stock issued upon exercise of the Warrant.
Pursuant to the Securities Purchase Agreement, until the UST no longer owns any shares of the Senior Preferred Stock, the
Warrant or Warrant Shares, the Corporations employee benefit plans and other executive compensation arrangements for its Senior Executive Officers must continue to comply in all respects with Section 111(b) the EESA and the rules and
regulations of the UST promulgated thereunder.
The Securities
Purchase Agreement permits the UST to unilaterally amend any provision of the Letter Agreement and the Securities Purchase Agreement to the extent required to comply with any changes in the applicable Federal statutes.
For accounting purposes, the proceeds of $1,715 million were allocated
between the preferred stock and the warrant based on their relative fair values. The initial value of the Warrant, which is classified as equity, was $81.12 million. The entire discount on the Senior Preferred Stock, created from the initial value
assigned to the Warrant, will be accreted over a five year period in a manner that produces a level preferred stock dividend yield which is 6.10%. At the end of the fifth year, the carrying amount of the Senior Preferred Stock will equal its
liquidation value.
The Corporation has a Stock Repurchase
Program under which up to 12 million shares of the Corporations common stock can be repurchased annually. During the first quarter 2008, the Corporation acquired 4,782,400 shares of its common stock in open market share repurchase
transactions under the Stock Repurchase Program. Total cash consideration amounted to $124.9 million. During 2007, the Corporation completed three accelerated repurchase transactions as well as open market repurchase transactions under its
authorized Stock Repurchase Program. In the aggregate, the Corporation acquired 10,765,889 shares of its common stock in these transactions. Total consideration in these transactions amounted to $437.1 million and consisted of cash of $434.5 million
and common treasury stock valued at $2.6 million. In connection with the initial accelerated repurchase transaction completed in 2007, the Corporation used 54,035 shares of its treasury common stock to share-settle the final settlement obligation.
During 2006, the Corporation repurchased 1.0 million shares of its common stock at an aggregate cost of $41.8 million. Participation in the CPP requires the Corporation to obtain consent from the UST in order to repurchase common stock under
its Stock Repurchase Program.
At December 31, 2008, the
net loss in accumulated other comprehensive income amounted to $158.0 million which represents a negative change in accumulated other comprehensive income of $104.3 million since December 31, 2007. Net accumulated other comprehensive income
associated with available for sale investment securities was a net loss of $57.1 million at December 31, 2008, compared to a net loss of $10.3 million at December 31, 2007, resulting in a net loss of $46.8 million over the twelve month
period. The unrealized loss associated with the change in fair value of the Corporations derivative financial instruments designated as cash flow hedges increased $55.8 million since December 31, 2007, resulting in a net decrease in
shareholders equity. The accumulated other comprehensive income which represents the amount required to adjust the Corporations postretirement health benefit liability to its funded status amounted to an unrealized gain of $1.8 million
as of December 31, 2008.
55
Federal and state banking laws place certain restrictions on the amount of dividends and loans which a
bank may make to its parent company. Such restrictions have not had, and are not expected to have, any material effect on the Corporations ability to meet its cash obligations.
The Corporation manages its liquidity to ensure that funds are available to each of its banks to satisfy the cash flow
requirements of depositors and borrowers and to ensure the Corporations own cash requirements are met. The Corporation maintains liquidity by obtaining funds from several sources.
The Corporations most readily available source of liquidity is its investment portfolio. Investment securities
available for sale, which totaled $7.4 billion at December 31, 2008, represent a highly accessible source of liquidity. The Corporations portfolio of held-to-maturity investment securities, which totaled $0.2 billion at December 31,
2008, provides liquidity from maturities and interest payments. The Corporations loans held for sale provide additional liquidity. At December 31, 2008 these loans represent loans that are prepared for delivery to investors, which
generally occurs within thirty to ninety days after the loan has been funded or designated as held for sale.
Depositors within M&Is defined markets are another source of liquidity. Core deposits (demand, savings, money market and consumer time deposits)
averaged $23.3 billion in 2008. The Corporations banking affiliates may also access the Federal funds markets, the Federal Reserves Term Auction Facility or utilize collateralized borrowings such as treasury demand notes, FHLB advances,
agricultural mortgage backed notes or other forms of collateralized borrowings.
The Corporations banking affiliates may use wholesale deposits, which include foreign (Eurodollar) deposits. Wholesale deposits, which averaged $10.2 billion in 2008, are deposits generated through distribution
channels other than the Corporations own banking branches. The weighted average remaining term of outstanding brokered and institutional certificates of deposit at December 31, 2008 was 10.6 years. These deposits allow the
Corporations 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 not to pursue single service time deposit relationships in markets that have experienced some unprofitable pricing levels.
The Corporation may use certain financing arrangements to meet its balance sheet management, funding, liquidity, and market or credit risk management
needs. The majority of these activities are basic term or revolving securitization vehicles. These vehicles are generally funded through term-amortizing debt structures or with short-term commercial paper designed to be paid off based on the
underlying cash flows of the assets securitized. These facilities provide access to funding sources substantially separate from the general credit risk of the Corporation and its subsidiaries.
M&I Bank has implemented a global bank note program that permits it to
issue up and sell up to a maximum of US$13.0 billion aggregate principal amount (or the equivalent thereof in other currencies) at any one time outstanding of its senior global bank notes with maturities of seven days or more from their respective
date of issue and subordinated global bank notes with maturities more than five years from their respective date of issue. The notes may be fixed rate or floating rate and the exact terms will be specified in the applicable Pricing Supplement or the
applicable Program Supplement. This program is intended to enhance liquidity by enabling M&I Bank to sell its debt instruments in global markets in the future without the delays that would otherwise be incurred. At December 31, 2008,
approximately $8.9 billion of new debt could be issued under M&I Banks global bank note program.
Bank notes outstanding at December 31, 2008 amounted to $4.1 billion of which $1.9 billion is subordinated. A portion of the subordinated bank notes
qualifies as supplementary capital for regulatory capital purposes.
The national capital markets represent a further source of liquidity to the Corporation.
During the second quarter of 2008, the Corporation filed a shelf registration statement with the Securities and Exchange Commission enabling the
Corporation to issue up to 6.0 million shares of its common stock, which may be offered and issued from time to time in connection with acquisitions by the Corporation and/or other consolidated subsidiaries of the Corporation. At
December 31, 2008, approximately 1.14 million shares of the Corporations common stock could be issued under the shelf registration statement for future acquisitions.
56
As a result of the Separation, on November 1, 2007, Marshall & Ilsley Corporation
(Accounting Predecessor to New Marshall & Ilsley Corporation) became M&I LLC and amounts remaining under the existing shelf registration statements were deregistered. There will be no further issuances of debt by M&I LLC.
On November 6, 2007, New Marshall & Ilsley
Corporation filed a shelf registration statement pursuant to which the Corporation was initially authorized to raise up to $1.9 billion through sales of corporate debt and/or equity securities with a relatively short lead time.
The Corporation has a commercial paper program. At December 31, 2008
commercial paper outstanding amounted to approximately $17.3 million. At December 31, 2008 all of the commercial paper obligations of M&I LLC, which were issued prior to the Separation, had matured and there will be no further issuances of
commercial paper by M&I LLC.
The Corporation and/or
M&I Bank may repurchase or redeem its outstanding debt securities from time to time, including, without limitation, senior and subordinated global bank notes, medium-term corporate notes, MiNotes or junior subordinated deferrable interest
debentures and the related trust preferred securities. Such repurchases or redemptions may be made in open market purchases, in privately negotiated transactions or otherwise for cash or other consideration. Any such repurchases or redemptions will
be made on an opportunistic basis as market conditions permit and are dependent on the Corporations liquidity needs, compliance with any contractual or indenture restrictions and regulatory requirements and other factors the Corporation deems
relevant.
The market impact of the recession and deterioration
in the national real estate markets have resulted in a decline in market confidence and a subsequent strain on liquidity in the financial services sector. However, the Separation in 2007 and participation in the CPP in 2008 provided the Corporation
with over four billion dollars in cash and significantly increased its regulatory and tangible capital levels. Management expects that it will continue to make use of a wide variety of funding sources, including those that have not shown the levels
of stress demonstrated in some of the national capital markets. Notwithstanding the current national capital market impact on the cost and availability of liquidity, management believes that it has adequate liquidity to ensure that funds are
available to the Corporation and each of its banks to satisfy their cash flow requirements. However, if capital markets deteriorate more than management currently expects, the Corporation could experience stress on its liquidity position.
Contractual Obligations
The following table summarizes the Corporations more significant
contractual obligations at December 31, 2008. Excluded from the following table are a number of obligations to be settled in cash. These items are reflected in the Corporations consolidated balance sheet and include deposits with no
stated maturity, trade payables, accrued interest payable and derivative payables that do not require physical delivery of the underlying instrument.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period ($ in millions)
|
Contractual Obligations
|
|
Note
Ref
|
|
|
Total
|
|
Less than
One Year
|
|
One to
Three Years
|
|
Three to
Five Years
|
|
More than
Five Years
|
Certificate of Deposit and Other Time Deposit Obligations
|
|
(1
|
)
|
|
$
|
19,908.3
|
|
$
|
9,121.5
|
|
$
|
2,577.1
|
|
$
|
2,129.8
|
|
$
|
6,079.9
|
Short-term Debt Obligations
|
|
(2
|
)
|
|
|
4,058.0
|
|
|
4,058.0
|
|
|
|
|
|
|
|
|
|
Long-term Debt Obligations
|
|
(3
|
)
|
|
|
11,102.6
|
|
|
2,472.0
|
|
|
4,048.3
|
|
|
2,266.8
|
|
|
2,315.5
|
Capital Lease Obligations
|
|
|
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
0.2
|
Minimum Operating Lease Obligations
|
|
|
|
|
|
194.8
|
|
|
29.1
|
|
|
48.8
|
|
|
39.9
|
|
|
77.0
|
Obligations to Purchase Foreign Currencies
|
|
(4
|
)
|
|
|
532.7
|
|
|
532.7
|
|
|
|
|
|
|
|
|
|
Purchase ObligationsFacilities (Additions, Repairs and Maintenance)
|
|
|
|
|
|
12.6
|
|
|
12.6
|
|
|
|
|
|
|
|
|
|
Purchase ObligationsTechnology
|
|
|
|
|
|
433.8
|
|
|
111.4
|
|
|
215.5
|
|
|
106.9
|
|
|
|
Purchase ObligationsOther
|
|
|
|
|
|
6.4
|
|
|
2.8
|
|
|
3.0
|
|
|
0.6
|
|
|
|
Other Obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unfunded Investment Obligations
|
|
(5
|
)
|
|
|
29.7
|
|
|
23.0
|
|
|
5.1
|
|
|
1.3
|
|
|
0.3
|
Defined Contribution Benefit Obligations
|
|
(6
|
)
|
|
|
47.7
|
|
|
47.7
|
|
|
|
|
|
|
|
|
|
Health and Welfare Benefits
|
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
$
|
36,326.8
|
|
$
|
16,410.8
|
|
$
|
6,897.8
|
|
$
|
4,545.3
|
|
$
|
8,472.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
57
Notes:
In the banking industry, interest-bearing obligations are
principally utilized to fund interest-bearing assets. As such, interest charges on certificate of deposit and other time deposit obligations and short-term debt obligations were excluded from amounts reported, as the potential cash outflows would
have corresponding cash inflows from interest-bearing assets. The same, although to a lesser extent, is the case with respect to interest charges on long-term debt obligations. As long-term debt obligations may be used for purposes other than to
fund interest-bearing assets, an estimate of interest charges is included in the amounts reported.
As of December 31, 2008, the Corporation has unrecognized tax benefits that if recognized, would impact the annual effective tax rate in future
periods. Due to the uncertainty of the amounts to be ultimately paid as well as the timing of such payments, all uncertain tax liabilities that have not been paid have been excluded from the Contractual Obligations table. See Note 16 in Notes to
Consolidated Financial Statements for further information regarding the Corporations income taxes.
|
(1)
|
|
Certain retail certificates of deposit and other time deposits give customers rights to early withdrawal. Early withdrawals may be subject to penalties. The penalty amount depends
on the remaining time to maturity at the time of early withdrawal. Brokered certificates of deposits may be redeemed early upon the death or adjudication of incompetence of the holder.
|
|
(2)
|
|
Many short-term borrowings such as Federal funds purchased and security repurchase agreements and commercial paper are expected to be reissued and, therefore, do not necessarily
represent an immediate need for cash. See Note 13 in Notes to Consolidated Financial Statements for a description of the Corporations other short-term borrowings.
|
|
(3)
|
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See Note 14 in Notes to Consolidated Financial Statements for a description of the Corporations various long-term borrowings. The amounts shown in the table include interest
on both fixed and variable rate obligations. The interest associated with variable rate obligations is based upon rates in effect at December 31, 2008. The contractual amounts to be paid on variable rate obligations are affected by changes in
market interest rates. Future changes in market interest rates could materially affect the contractual amounts to be paid.
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(4)
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See Note 20 in Notes to Consolidated Financial Statements for a description of the Corporations foreign exchange activities. The Corporation generally matches commitments to
deliver foreign currencies with obligations to purchase foreign currencies which minimizes the immediate need for cash.
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(5)
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The Corporation also has unfunded obligations for certain investments in investment funds. Under the obligations for certain investments in investment funds the Corporation could be
required to invest an additional $45.9 million if the investment funds identify and commit to invest in additional qualifying investments. The investment funds have limited lives and defined periods for investing in new qualifying investments or
providing additional funds to existing investments. As a result, the timing and amount of the funding requirements for these obligations are uncertain and could expire with no additional funding requirements.
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(6)
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See Note 18 in Notes to Consolidated Financial Statements for a description of the Corporations defined contribution program. The amount shown represents the unfunded
contribution for the year ended December 31, 2008.
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(7)
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The health and welfare benefit plans are periodically funded throughout each plan year with participant contributions and the Corporations portion of benefits expected to be
paid.
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The Corporation has generally financed its
growth through the retention of earnings and the issuance of debt. It is expected that future growth can be financed through internal earnings retention, additional debt offerings, or the issuance of additional common or preferred stock or other
capital instruments.
OFF-BALANCE SHEET ARRANGEMENTS
The term off-balance sheet arrangement describes the means
through which companies typically structure off-balance sheet transactions or otherwise incur risks of loss that are not fully transparent to investors or other users of financial information. For example, in many cases, in order to facilitate
transfer of assets or otherwise finance the activities of an unconsolidated entity, a company may be required to provide financial support designed to reduce the
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risks to the entity or other third parties. That financial support may take many different forms such as financial guarantees, subordinated retained
interests, derivative instruments or other contingent arrangements that expose the company to continuing risks or contingent liabilities regardless of whether or not they are recorded on the balance sheet.
Certain guarantees may be a source of potential risk to future liquidity,
capital resources and results of operations. Guarantees may be in the form of contracts that contingently require the guarantor to make payments to the guaranteed party based on: (1) changes in an underlying instrument or variable such as a
financial standby letter of credit or credit support agreement; (2) failure to perform under an obligating agreement such as a performance standby letter of credit; and (3) indemnification agreements that require the indemnifying party to
make payments to the indemnified party based on changes in an underlying instrument or variable that is related to an asset, a liability or an equity security of the indemnified party, such as an adverse judgment in a lawsuit. The Corporation, for a
fee, regularly enters into standby letters of credit transactions and provides certain indemnifications against loss in conjunction with securities lending activities, which are described in detail in Note 19 Financial Instruments with
Off-Balance Sheet Risk and Note 24 Guarantees in Notes to Consolidated Financial Statements.
Companies may structure and facilitate off-balance sheet arrangements by retaining an interest in assets transferred to an unconsolidated entity. Such
interests may be in the form of a subordinated retained interest in a pool of receivables transferred to an unconsolidated entity, cash collateral accounts, recourse obligations or other forms of credit, liquidity, or market risk support. These
subordinated interests protect the senior interests in the unconsolidated entity in the event a portion of the underlying transferred assets becomes uncollectible or there are insufficient funds to repay senior interest obligations. The Corporation
has used such arrangements primarily in conjunction with its indirect automobile lending activities that are described in detail in Note 9Financial Asset Sales and Variable Interest Entities in Notes to Consolidated Financial Statements.
As described in Note 14Long-term Borrowings in Notes to
Consolidated Financial Statements, the Corporation holds all of the common interest in certain trusts that issued cumulative preferred capital securities which are supported by junior subordinated deferrable interest debentures and a full guarantee
issued by the Corporation.
In conjunction with the banking
acquisitions of Gold Banc, Trustcorp Financial, Inc., Excel Bank Corporation and First Indiana, the Corporation acquired all of the common interests in trusts that issued cumulative preferred capital securities which are supported by junior
subordinated deferrable interest debentures. M&I LLC has fully and unconditionally guaranteed the securities that these trusts have issued. At December 31, 2008, the principal amounts outstanding associated with these trusts amounted to
$16.0 million, $30.0 million, $38.0 million and $15.0 million. The Corporation does not consolidate any of these trusts in accordance with United States generally accepted accounting principles.
At December 31, 2008, the Corporation did not hold any material variable
interests in entities that provide it liquidity, market risk or credit risk support, or engage in leasing, hedging or research and development services with the Corporation. Based on the off-balance sheet arrangements with which it is presently
involved, the Corporation does not believe that such off-balance sheet arrangements either have, or are reasonably likely to have, a material impact to its current or future financial condition, results of operations, liquidity or capital.
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CRITICAL ACCOUNTING POLICIES
The Corporation has established various accounting policies that govern the application of accounting principles generally
accepted in the United States in the preparation of the Corporations consolidated financial statements. The significant accounting policies of the Corporation are described in the footnotes to the consolidated financial statements contained
herein 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 managements estimate of probable losses inherent in the
Corporations 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 Corporations nonaccrual loans and renegotiated loans form the basis 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 loans effective interest rate; (2) the loans 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 managements attention due to underlying problems in the borrowers business or
collateral concerns. A quarterly review of nonaccrual loans, subject to minimum size, and all renegotiated 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 borrowers ability to make payments when due.
Collective Loan Impairment.
This component of the allowance for loan and lease losses is comprised of two elements. First, the Corporation makes a
significant number of loans and leases, which due to their underlying similar characteristics, are assessed for loss as homogeneous pools. Included in the homogeneous pools are loans and leases from the retail sector and commercial loans under a
certain size that have been excluded from the specific reserve allocation previously discussed. The Corporation segments the pools by type of loan or lease and, using historical loss information, estimates a loss reserve for each pool.
The second element reflects managements recognition of the
uncertainty and imprecision underlying the process of estimating losses. The Corporation has identified certain 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 managements judgment, reserve ranges are allocated to industry segments due to environmental conditions unique to the measurement period. Consideration
is given to both internal and external environmental factors such as economic conditions in certain geographic or industry segments of the portfolio, economic trends, risk profile, and portfolio composition. Reserve ranges are then allocated using
estimates of loss exposure that management has identified based on these economic trends or conditions.
The Corporation has not materially changed any aspect of its overall approach in the determination of the allowance for loan and lease losses. However, on
an on-going basis the Corporation continues to refine the methods used in determining managements best estimate of the allowance for loan and lease losses.
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The following factors were taken into consideration in determining the adequacy of the allowance for loan
and lease losses at December 31, 2008:
Deteriorating
conditions in the U.S. housing market became evident in the first half of 2007, accelerated sharply in the second half of the year and continued the accelerated pace in 2008. The Corporation had a significant increase in nonperforming assets in 2008
compared to prior years. The increase has been primarily attributable to real estate related loans in areas that were previously experiencing substantial population growth and increased demand for housing such as Arizona and Florida, and in the
correspondent banking business. The Corporations higher growth markets have been disproportionately affected by the excess real estate inventory and deterioration in the national real estate markets as the economy deteriorated into recession.
An increasing number of borrowers have been unable to either refinance or sell their properties and consequently have defaulted or are very close to defaulting on their loans. In this stressed housing market that is experiencing increasing
delinquencies and rapidly declining real estate values, the adequacy of collateral securing the loan becomes a much more important factor in determining expected loan performance. In many cases, rapidly declining real estate values resulted in the
determination that the collateral was insufficient to cover the recorded investment in the loan. These factors resulted in the Corporations loan and lease portfolio experiencing significantly higher incidences of default and a significant
increase in loss severity in 2008. The Corporation has taken these factors into consideration in determining the adequacy of its allowance for loan and leases.
At December 31, 2008, allowances for loan and lease losses continue to be carried for exposures to manufacturing, production agriculture
(including dairy and cropping operations and agricultural supply), truck transportation, accommodation, general contracting, and motor vehicle and parts dealers. While most loans in these categories are still performing, the Corporation continues to
believe these sectors present a higher than normal risk due to their financial and external characteristics.
The Corporations primary lending areas are Wisconsin, Arizona, Minnesota, Missouri, Florida and Indiana. Recent acquisitions are in relatively new
markets for the Corporation. Included in these new markets is the Kansas City metropolitan area and Tampa, Sarasota and Bradenton, Florida and the Indianapolis and central Indiana market. Each of these regions and markets has cultural and
environmental factors that are unique to it. Nonperforming loans in Arizona amounted to $857.5 million, which was 47.3% of total consolidated nonperforming loans and leases at December 31, 2008. Approximately $585.5 million or 68.3% of
nonperforming loans in Arizona at December 31, 2008 were construction and development loans. Approximately $142.7 million or 78.4% of nonperforming loans in Arizona at December 31, 2007 were construction and development loans.
Nonperforming loans in Florida amounted to $172.8 million or 5.60% of total Florida loans at December 31, 2008. Approximately $113.5 million or 65.7% of nonperforming loans in Florida at December 31, 2008 were construction and development
loans. Construction and development real estate loans that are concentrated in the west coast of Florida and Arizona have been the primary contributor to the increase in nonperforming loans and leases and net charge-offs in recent quarters.
At December 31, 2008, nonperforming loans and leases
amounted to $1,811.8 million or 3.62% of consolidated loans and leases compared to $925.2 million or 2.00% of consolidated loans and leases at December 31, 2007 and $268.0 million or 0.64% of consolidated loans and leases at December 31,
2006. Nonperforming commercial loans and leases amounted to $180.5 million at December 31, 2008 compared to $273.1 million at December 31, 2007, a decrease of $92.6 million or 33.9%. Nonperforming real estate loans represented 84.4% of
total nonperforming loans and leases and amounted to $1,529.8 million at December 31, 2008 compared to $593.5 million at December 31, 2007, an increase of $936.3 million or 157.8%. Nonperforming real estate loans, other than home equity
loans and lines of credit, exhibited the largest increase in 2008 compared to 2007. Nonperforming construction and development loans (which include commercial land and construction, construction by individuals and residential land and construction
by developers) amounted to $1,017.3 million and represented 56.1% of total nonperforming loans and leases at December 31, 2008. The increase in nonperforming construction and development loans in 2008 compared to 2007 amounted to $567.6 million
or 126.2% which was 60.6% of the total increase in nonperforming real estate loans in 2008 compared to 2007. Nonperforming 1-4 family residential real estate loans amounted to $324.3 million at December 31, 2008 compared to $59.6 million at
December 31, 2007 an increase of $264.7 million. Increased economic stress on consumers has resulted in further deterioration in these loans in all of the Corporations markets and most notably in Arizona, which contributed $196.7 million
or 74.3% of the increase in nonperforming 1-4 family residential real estate loans at December 31, 2008 compared to December 31, 2007. Nonperforming consumer loans and leases amounted to
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$101.5 million at December 31, 2008 compared to $58.6 million at December 31, 2007, an increase of $42.9 million or 73.2%. Approximately 83.4% of
that increase was due to the increase in nonperforming home equity loans and lines of credit in 2008 compared to 2007. As is the case with nonperforming 1-4 family residential real estate loans, increased economic stress on consumers has resulted in
further deterioration in consumer loans and leases in all of the Corporations markets.
Nonaccrual loans and leases were the largest component of nonperforming loans and leases and amounted to $1,527.0 million or 3.05% of consolidated loans and leases at December 31, 2008 compared to $686.9 million
or 1.48% of consolidated loans and leases at December 31, 2007. The amount of cumulative charge-offs recorded on the Corporations nonaccrual loans outstanding at December 31, 2008 was approximately $664.1 million or 49.0% of the
unpaid principal balance of the affected nonaccrual loans and 30.3% of the unpaid principal balance of its total nonaccrual loans outstanding at December 31, 2008. These charge-offs have reduced the carrying value of these nonaccrual loans and
leases which reduced the allowance for loan and lease losses required at the measurement date.
At December 31, 2008, renegotiated loans and leases amounted to $270.4 million. Approximately $259.8 million or 96.1% of the renegotiated loans and
leases at December 31, 2008 were real estate and home equity loans. Approximately $214.3 million or 82.5% of the renegotiated real estate and home equity loans at December 31, 2008 were loans secured by real estate located in Arizona. At
December 31, 2008, approximately $135.3 million or 52.1% of the renegotiated real estate and home equity loans were construction and development loans. The present value of expected future cash flows discounted at the loans effective
interest rate was the primary method used to measure impairment and determine the amount of allowance for loan and lease losses required for renegotiated loans and leases at December 31, 2008. Significant judgment is required to estimate
expected future cash flows.
Net charge-offs amounted to
$1,363.8 million or 2.74% of average loans and leases in 2008 compared to $255.9 million or 0.59% of average loans and leases in 2007 and $39.0 million or 0.10% of average loans and leases in 2006. The increase in net charge-offs in 2008 and 2007
compared to prior years related primarily to the deterioration in the performance of the Corporations real estate loan portfolio. The Corporations construction and development real estate loans exhibited the most dramatic increase in
impairment. In addition, commercial loans whose performance is dependent on the housing market were adversely affected by the deterioration in the national real estate markets.
Based on the loss estimates discussed, management determined its best estimate of the required allowance for loans and
leases. Managements evaluation of the factors previously described resulted in an allowance for loan and lease losses of $1,202.2 million or 2.41% of loans and leases outstanding at December 31, 2008. The allowance for loan and lease
losses was $496.2 million or 1.07% of loans and leases outstanding at December 31, 2007. Consistent with the credit quality trends noted above, the provision for loan and lease losses amounted to $2,037.7 million in 2008, compared to $319.8
million and $50.6 million in 2007 and 2006, respectively. The resulting provisions for loan and lease losses are the amounts required to establish the allowance for loan and lease losses at the required level after considering charge-offs and
recoveries. Management recognizes there are significant estimates in the process and the ultimate losses could be significantly different from those currently estimated.
Income Taxes
Income taxes are accounted for using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on tax assets and liabilities of a change in tax rates is recognized in the income statement in the period that includes
the enactment date.
The determination of current and deferred
income taxes is based on complex analyses of many factors, including interpretation of Federal and state income tax laws, the difference between tax and financial reporting basis of assets and liabilities (temporary differences), estimates of
amounts currently due or owed, such as the timing of reversals of temporary differences and current accounting standards. The Federal and state taxing authorities who make assessments based on their determination of tax laws periodically review the
Corporations 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.
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The Corporation accounts for the uncertainty in income taxes recognized in financial statements in
accordance with the recognition threshold and measurement process for a tax position taken or expected to be taken in a tax return in accordance with Financial Accounting Standards Board (FASB) Interpretation No. 48 (FIN
48),
Accounting for Uncertainty in Income Taxesan Interpretation of FASB Statement No. 109
. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods,
disclosure and transition. FIN 48 was adopted by the Corporation on January 1, 2007. See Note 16 Income Taxes in Notes to Consolidated Financial Statements.
As a result of the Internal Revenue Services decision not to appeal a November 2007 US Tax Court ruling related to how the TEFRA
(interest expense) disallowance should be calculated within a consolidated group and the position the IRS has taken in another related case, the Corporation recognized an additional income tax benefit related to years 1996-2007 of $20.0 million for
its similar issue in 2008.
The Corporation anticipates it is
reasonably possible that unrecognized tax benefits up to approximately $20 million could be realized within 12 months of December 31, 2008. The realization would principally result from settlements with taxing authorities as it relates to the
tax benefits associated with a 2002 stock issuance.
In
February 2009, the State of Wisconsin passed legislation that requires combined reporting effective January 1, 2009. The Corporation is evaluating this legislation and has not yet determined the legislations effect on the recorded value
of its deferred tax assets and the financial statement impact.
Fair Value Measurements
Effective
January 1, 2008, the Corporation adopted Statement of Financial Accounting Standards No. 157,
Fair Value Measurements
(SFAS 157), which provides a framework for measuring fair value under accounting principles
generally accepted in the United States of America. SFAS 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. SFAS
157 addresses the valuation techniques used to measure fair value. These valuation techniques include the market approach, income approach and cost approach. The market approach uses prices or relevant information generated by market transactions
that are identical to or comparable with assets or liabilities. The income approach involves converting future amounts to a single present amount. The measurement is valued based on current market expectations about those future amounts. The cost
approach is based on the amount that currently would be required to replace the service capacity of an asset.
SFAS 157 establishes a fair value hierarchy, which prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The
fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The reported fair value of a financial instrument is
categorized within the fair value hierarchy based upon the lowest level of input that is significant to the instruments fair value measurement. The three levels within the fair value hierarchy consist of the following:
Level 1Inputs to the valuation methodology are quoted prices
(unadjusted) for identical assets or liabilities in active markets.
Level 2Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full
term of the financial instrument. Fair values for these instruments are estimated using pricing models, quoted prices of financial assets or liabilities with similar characteristics or discounted cash flows.
Level 3Inputs to the valuation methodology are unobservable and
significant to the fair value measurement. Fair values are initially valued based upon a transaction price and are adjusted to reflect exit values as evidenced by financing and sale transactions with third parties.
The Corporation measures financial assets and liabilities at fair value in
accordance with SFAS 157. These measurements involve various valuation techniques and models, which involve inputs that are observable, when available. A description of the valuation methodologies used for financial instruments measured at fair
value on a recurring basis, as well as the general classification of such instruments pursuant to the valuation hierarchy is disclosed in Note 3Fair Value Measurements in Notes to Consolidated Financial Statements.
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In addition to financial instruments that are measured at fair value on a recurring basis, fair values
are used in purchase price allocations and goodwill impairment testing.
Other than Level 1 inputs, selecting the relevant inputs, appropriate valuation techniques and determining the appropriate category to report the fair value of a financial instrument requires varying levels of judgment depending on the
facts and circumstances. The determination of some fair values can be a complex analysis of many factors. Judgment is required when determining the fair value of an asset or liability when either relevant observable inputs do not exist or available
observable inputs are in a market that is not active. When relevant observable inputs are not available, the Corporation must use its own assumptions about future cash flows and appropriately risk-adjusted discount rates. Conversely, in some cases
observable inputs may require significant adjustments. For example, in cases where the volume and level of trading activity in an asset or liability have declined significantly, the available prices vary significantly over time or among market
participants, or the prices are not current, the observable inputs might not be relevant and could require significant adjustment.
Valuation techniques and models used to measure the fair value of financial assets on a recurring basis are reviewed and validated by the Corporation at
least quarterly and in some cases monthly. In addition, the Corporation monitors the fair values of significant assets and liabilities using a variety of methods including the evaluation of pricing service information, using exception reports based
on analytical criteria, comparisons to previous trades or broker quotes and overall reviews and assessments for reasonableness.
Goodwill Impairment Tests
Goodwill is tested for impairment using a two-step process that begins with an estimation of the fair value of a reporting unit. A reporting unit is an
operating segment as defined in Statement of Financial Accounting Standards No. 131,
Disclosures about Segments of an Enterprise and Related Information
, or one level below an operating segment. This first step is a screen for potential
impairment. The second step, if necessary, measures the amount of impairment, if any. Goodwill is reviewed for impairment annually as of June 30 or more frequently if indicators of impairment exist. Goodwill has been assigned to seven Reporting
Units for purposes of impairment testing.
A significant amount
of judgment is involved in determining if an indicator of impairment has occurred. Such indicators may include, among others: a significant decline in expected future cash flows; a sustained, significant decline in equity price and market
capitalization; a significant adverse change in legal factors or in the business climate; unanticipated competition; and slower growth rates.
At the end of the fourth quarter of 2008, due to the economic recession, general stock price volatility, and volatility in the Corporations stock
price in particular, the Corporation concluded a triggering event had occurred indicating potential impairment and performed an impairment test of goodwill.
Significant judgment is applied when goodwill is assessed for impairment. This judgment includes developing cash flow projections, selecting appropriate
discount rates, identifying relevant market comparables, incorporating general economic and market conditions and selecting an appropriate control premium. The assumptions used in the goodwill impairment assessment and the application of these
estimates and assumptions are discussed below.
The estimated
fair value for each reporting unit at December 31, 2008 was determined by equally weighting an income approach (50%) and market approach (50%) to assess if potential goodwill impairment existed.
The income approach is based on discounted cash flows which are derived from
internal forecasts and economic expectations for each respective reporting unit. The key assumptions used to determine fair value under the income approach included the cash flow period, terminal values based on a terminal growth rate and the
discount rate. The discount rate, which represents the estimated cost of equity, was derived using a capital asset pricing model that uses a risk-free rate (20-year Treasury Bonds) which was 3.1% at December 31, 2008. The risk-free rate was adjusted
for the risks associated with the operations of the Reporting Units. The discount rates used in the income approach for the seven Reporting Units evaluated at December 31, 2008 ranged from 10% to 25%. An increase to the discount rate of 1% would
have lowered the fair value determined under the income approach for the seven Reporting Units evaluated at December 31, 2008 by a range of $2.4 million to $86.6 million or 4.9% to 18.3%.
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The market approach is a technique that provides indications of value based upon comparisons of the
reporting unit to market values and pricing evidence of public companies in the same or similar lines of businesses. Market ratios (pricing multiples) and performance fundamentals relating to the public companies stock prices (equity) as of
December 31, 2008 were applied to each reporting unit to determine indications of its fair value.
The aggregate fair values were compared to the Corporations market capitalization as an assessment of the appropriateness of the fair value
measurements. The Corporations stock price fluctuated greatly during 2008. Therefore, when assessing the Corporations market capitalization, the Corporation used the average stock price for the month of December 2008 and adjusted the stock
price for certain material nonpublic information relating to 2008 that became public when the Corporation initially announced its earnings for the three and twelve months ended December 31, 2008. That adjustment was measured as the incremental
difference between the change in the Corporations stock price between December 31, 2008 and the date the certain material nonpublic information became public and the change in the KBW bank stock index (NYSEArca: KBE) between December 31, 2008
and the date the Corporations certain material nonpublic information became public. The comparison between the aggregate fair values and market capitalization indicated an implied premium. A control premium analysis indicated that the implied
premium was within a range of the overall premiums observed in the market place.
As a result of applying the first step of goodwill impairment testing to determine if potential goodwill impairment existed at December 31, 2008, Trust, Private Banking, and Brokerage, the three Reporting Units that
comprise the Wealth Management segment, and the Capital Markets reporting unit passed (fair value exceeded the carrying amount) the first step of the goodwill impairment test. The Commercial and Community Banking segments and the
National Consumer Banking reporting unit failed (the carrying amount exceeded the fair value) the first step of the goodwill impairment test at December 31, 2008 and were subjected to the second step of the goodwill impairment test.
For the four Reporting Units that passed step one, fair value
exceeded the carrying amount by 22% to 79% of their respected estimated fair values. For the three Reporting Units that failed, the carrying amount exceeded fair value by between 93% and 290%.
The second step of the goodwill impairment test compares the implied fair
value of the reporting unit goodwill with the carrying amount of that goodwill. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination is determined. The fair value of a
reporting unit is allocated to all of the assets and liabilities of that unit (including any unrecognized intangible assets) as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the price
paid to acquire the reporting unit. The fair value allocated to all of the assets and liabilities of that unit (including any unrecognized intangible assets) also requires significant judgment, especially for those assets and liabilities that are
not measured on a recurring basis such as certain types of loans. The excess of the fair value of the reporting unit over the amounts assigned to its assets and liabilities is the implied fair value of goodwill. The Corporation believes the implied
fair value of goodwill is significantly affected by unobservable inputs and would be categorized as Level 3 within the SFAS 157 fair value hierarchy.
For the three Reporting Units that failed step one of the goodwill impairment tests, the fair value assigned to loans and leases significantly affected
the determination of the implied fair value of the reporting unit goodwill at December 31, 2008. The implied fair value of a reporting units goodwill will generally increase if the fair value of its loans and leases are less than the
carrying value of the reporting units loans and leases. The fair value of loans and leases was derived from discounted cash flow analysis. Loans and leases as of December 31, 2008 were grouped into over 950 pools based on similar
characteristics such as maturity, payment type and payment frequency, rate type and underlying index, recent loan-to-value (LTV) measures and various types of credit indicators such as recent FICO scores and the Corporations internal loan
rating system. Credit spreads were derived from observable information wherever possible. In cases where observable information was not available because of inactive markets or the change in the loan characteristics such as declining collateral
values, certain adjustments were judgmentally made to estimate credit spreads consistent with the manner the Corporation believes market participants would assess the fair value of the loan pool. The Corporation has estimated that increasing or
decreasing the credit spreads by the equivalent of a 1/4 credit rating adjustment could affect the aggregate fair value of the loans and leases of the three Reporting Units that failed step one of the goodwill impairment tests by approximately
15% of the aggregate fair value of the three Reporting Units that failed step one of the goodwill impairment tests at December 31, 2008.
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Based the second step of the goodwill impairment test, the Corporation determined that the implied fair
value of goodwill was greater than the carrying amount of goodwill for the National Consumer Banking reporting unit at December 31, 2008 and there was no impairment. The implied fair value of goodwill was less than the carrying amount of goodwill
for the Commercial Banking and Consumer Banking segments at December 31, 2008. As a result of applying the second step of the test, the Commercial Banking segment incurred goodwill impairment of $925.6 million and the Community Banking segment
incurred goodwill impairment of $609.5 million. For the year ended December 31, 2008, the pre-tax total non-cash charge to earnings for goodwill impairment amounted to $1,535.1 million. At December 31, 2008 the remaining goodwill reported in the
Consolidated Balance Sheets amounted to $605.1 million.
Due to
the current economic environment and the uncertainties regarding the impact on the Corporations Reporting Units, there can be no assurances that the Corporations estimates and assumptions regarding the duration of the economic recession,
or the period or strength of recovery, made for purposes of the Corporations goodwill impairment testing during the year ended December 31, 2008 will prove to be accurate predictions of the future. If the Corporations assumptions
regarding forecasted revenues or margin growth rates of certain Reporting Units is not achieved, the Corporation may be required to record additional goodwill impairment losses in future periods, whether in connection with the Corporations
next annual impairment testing in the second quarter of 2009 or prior to that, if any such changes constitutes a triggering event in other than the quarter in which the annual goodwill impairment test is performed. It is not possible at this time to
determine if any such future impairment loss would result or, if it does, whether such charge would be material.
New Accounting Pronouncements
A discussion of new accounting pronouncements that are applicable to the Corporation and have been or will be adopted by the Corporation is included in Note 1Basis of Presentation and Summary of Significant
Accounting Policies in Notes to Consolidated Financial Statements contained in Item 8, Consolidated Financial Statements and Supplementary Data.
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ITEM 7A.
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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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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 and market value under a variety of possible interest rate
scenarios. Financial institutions, by their nature, bear interest rate and liquidity risk as a necessary part of the business of managing financial assets and liabilities. The Corporation has designed strategies to limit these risks within prudent
parameters and identify appropriate risk/reward tradeoffs in the financial structure of the balance sheet.
The financial models identify the specific cash flows, repricing timing and embedded option characteristics of the assets and liabilities held by the
Corporation. The net change in net interest income in different market rate environments is the amount of earnings at risk. The net change in the present value of the asset and liability cash flows in different market rate environments is the amount
of market value at risk. Policies are in place to assure that neither earnings nor market value at risk exceed appropriate limits. The use of a limited array of derivative financial instruments has allowed the Corporation to achieve the desired
balance sheet repricing structure while simultaneously meeting the desired objectives of both its borrowing and depositing customers.
The models used include measures of the expected repricing characteristics of administered rate (NOW, savings and money market accounts) and non-rate
related products (demand deposit accounts, other assets and other liabilities). These measures recognize the relative insensitivity of these accounts to changes in market interest rates, as demonstrated through current and historical experiences. In
addition to contractual payment information for most other assets and liabilities, the models also include estimates of expected prepayment characteristics for those items that are likely to materially change their cash flows in different rate
environments, including residential mortgage products, certain commercial and commercial real estate loans and certain mortgage-related securities. Estimates for these sensitivities are based on industry assessments and are substantially driven by
the differential between the contractual coupon of the item and current market rates for similar products.
This information is incorporated into a model that projects future net interest income levels in several different interest rate environments. Earnings at
risk are calculated by modeling net interest income in an environment where rates remain constant, and comparing this result to net interest income in a different rate environment, and then expressing this difference as a percentage of net interest
income for the succeeding 12 months. This calculation is a change from prior years. Previously, earnings at risk were measured as a percentage of the Corporations budgeted operating income before taxes for the calendar year. This change was
made to decrease the volatility of the measurement caused by items unrelated to the margin. Since future interest rate moves are difficult to predict, the following table presents two potential scenariosa 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 December 31, 2008:
|
|
|
|
Hypothetical Change in Interest Rates
|
|
Impact to
12 months
Net Interest
Income
|
|
100 basis point gradual rise in rates
|
|
0.7
|
%
|
100 basis point gradual decline in rates
|
|
(2.2
|
)%
|
These results are
based solely on the modeled parallel changes in market rates, and do not reflect the earnings sensitivity that may arise from other factors such as changes in the shape of the yield curve and changes in spread between key market rates. These results
also do not include any management action to mitigate potential income variances within the simulation process. Such action could potentially include, but would not be limited to, adjustments to the repricing characteristics of any on- or
off-balance sheet item with regard to short-term rate projections and current market value assessments.
67
Actual results will differ from simulated results due to the timing, magnitude, and frequency of interest
rate changes as well as changes in market conditions and management strategies.
Equity Risk
In
addition to interest rate risk, the Corporation incurs market risk in the form of equity risk. The Corporation invests directly and indirectly through investment funds, in private medium-sized companies to help establish new businesses or
recapitalize existing ones. These investments expose the Corporation to the change in equity values of the portfolio companies. However, fair values are difficult to determine until an actual sale or liquidation transaction actually occurs. At
December 31, 2008, the carrying value of total active private equity investments amounted to approximately $65.3 million.
At December 31, 2008, Wealth Management administered $104.4 billion in assets and directly managed $30.4 billion in assets. Exposure exists to
changes in equity values due to the fact that fee income is partially based on equity balances. Quantification of this exposure is difficult due to the number of other variables affecting fee income. Interest rate changes can also have an effect on
fee income for the above-stated reasons.
68
ITEM 8.
|
|
CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA FOR YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006
|
Consolidated Balance Sheets
December 31 ($000s except share data)
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
Assets
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents:
|
|
|
|
|
|
|
|
|
Cash and Due from Banks
|
|
$
|
851,336
|
|
|
$
|
1,368,919
|
|
Federal Funds Sold and Security Resale Agreements
|
|
|
101,069
|
|
|
|
379,012
|
|
Money Market Funds
|
|
|
120,002
|
|
|
|
74,581
|
|
|
|
|
|
|
|
|
|
|
Total Cash and Cash Equivalents
|
|
|
1,072,407
|
|
|
|
1,822,512
|
|
Interest Bearing Deposits at Other Banks
|
|
|
9,684
|
|
|
|
8,309
|
|
Trading Assets, at Fair Value
|
|
|
518,361
|
|
|
|
124,607
|
|
Investment Securities:
|
|
|
|
|
|
|
|
|
Available for Sale, at Fair Value
|
|
|
7,430,552
|
|
|
|
7,442,889
|
|
Held to Maturity, Fair Value $243,395 ($383,190 in 2007)
|
|
|
238,009
|
|
|
|
374,861
|
|
Loans Held for Sale
|
|
|
220,391
|
|
|
|
131,873
|
|
|
|
|
|
|
|
|
|
|
Loans and Leases
|
|
|
49,764,153
|
|
|
|
46,164,385
|
|
Allowance for Loan and Lease Losses
|
|
|
(1,202,167
|
)
|
|
|
(496,191
|
)
|
|
|
|
|
|
|
|
|
|
Net Loans and Leases
|
|
|
48,561,986
|
|
|
|
45,668,194
|
|
Premises and Equipment, Net
|
|
|
564,789
|
|
|
|
469,879
|
|
Goodwill
|
|
|
605,144
|
|
|
|
1,684,945
|
|
Other Intangible Assets
|
|
|
158,305
|
|
|
|
123,016
|
|
Bank-Owned Life Insurance
|
|
|
1,157,612
|
|
|
|
1,114,889
|
|
Other Real Estate Owned (OREO)
|
|
|
320,908
|
|
|
|
115,074
|
|
Accrued Interest and Other Assets
|
|
|
1,478,270
|
|
|
|
767,548
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
62,336,418
|
|
|
$
|
59,848,596
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders Equity
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
Noninterest Bearing
|
|
$
|
6,879,994
|
|
|
$
|
6,174,281
|
|
Interest Bearing
|
|
|
34,143,147
|
|
|
|
29,017,073
|
|
|
|
|
|
|
|
|
|
|
Total Deposits
|
|
|
41,023,141
|
|
|
|
35,191,354
|
|
Federal Funds Purchased and Security Repurchase Agreements
|
|
|
1,190,000
|
|
|
|
2,262,355
|
|
Other Short-term Borrowings
|
|
|
2,868,033
|
|
|
|
4,548,655
|
|
Accrued Expenses and Other Liabilities
|
|
|
1,381,346
|
|
|
|
940,725
|
|
Long-term Borrowings
|
|
|
9,613,717
|
|
|
|
9,872,778
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
56,076,237
|
|
|
|
52,815,867
|
|
Shareholders Equity:
|
|
|
|
|
|
|
|
|
Preferred Stock, $1.00 par value, 5,000,000 Shares Authorized; 1,715,000 Shares Issued and Outstanding of Senior Preferred Stock, Series B
(Liquidation Preference of $1,000 per Share)
|
|
|
1,715
|
|
|
|
|
|
Common Stock, $1.00 par value, 700,000,000 Shares Authorized; 272,318,615 Shares Issued (267,455,394 Shares in 2007)
|
|
|
272,319
|
|
|
|
267,455
|
|
Additional Paid-in Capital
|
|
|
3,838,867
|
|
|
|
2,059,273
|
|
Retained Earnings
|
|
|
2,538,989
|
|
|
|
4,923,008
|
|
Treasury Stock, at Cost: 6,977,434 Shares (3,968,651 in 2007)
|
|
|
(192,960
|
)
|
|
|
(117,941
|
)
|
Deferred Compensation
|
|
|
(40,797
|
)
|
|
|
(45,359
|
)
|
Accumulated Other Comprehensive Income, Net of Related Taxes
|
|
|
(157,952
|
)
|
|
|
(53,707
|
)
|
|
|
|
|
|
|
|
|
|
Total Shareholders Equity
|
|
|
6,260,181
|
|
|
|
7,032,729
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Shareholders Equity
|
|
$
|
62,336,418
|
|
|
$
|
59,848,596
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes
are an integral part of the Consolidated Financial Statements.
69
Consolidated Statements of Income
Years ended December 31 ($000s except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
2006
|
|
Interest and Fee Income
|
|
|
|
|
|
|
|
|
|
|
|
Loans and Leases
|
|
$
|
2,926,334
|
|
|
$
|
3,243,109
|
|
$
|
2,856,043
|
|
Investment Securities:
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
286,054
|
|
|
|
311,837
|
|
|
277,938
|
|
Exempt from Federal Income Taxes
|
|
|
53,750
|
|
|
|
59,237
|
|
|
61,769
|
|
Trading Securities
|
|
|
2,530
|
|
|
|
1,012
|
|
|
614
|
|
Short-term Investments
|
|
|
9,026
|
|
|
|
18,001
|
|
|
14,707
|
|
Loan to Metavante
|
|
|
|
|
|
|
35,969
|
|
|
43,163
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Interest and Fee Income
|
|
|
3,277,694
|
|
|
|
3,669,165
|
|
|
3,254,234
|
|
|
|
|
|
Interest Expense
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
902,944
|
|
|
|
1,231,252
|
|
|
1,083,392
|
|
Short-term Borrowings
|
|
|
139,627
|
|
|
|
236,671
|
|
|
186,746
|
|
Long-term Borrowings
|
|
|
454,413
|
|
|
|
585,025
|
|
|
476,540
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Interest Expense
|
|
|
1,496,984
|
|
|
|
2,052,948
|
|
|
1,746,678
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Income
|
|
|
1,780,710
|
|
|
|
1,616,217
|
|
|
1,507,556
|
|
Provision for Loan and Lease Losses
|
|
|
2,037,707
|
|
|
|
319,760
|
|
|
50,551
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Income (Loss) After Provision for Loan and Lease Losses
|
|
|
(256,997
|
)
|
|
|
1,296,457
|
|
|
1,457,005
|
|
|
|
|
|
Other Income
|
|
|
|
|
|
|
|
|
|
|
|
Wealth Management
|
|
|
282,182
|
|
|
|
262,835
|
|
|
221,554
|
|
Service Charges on Deposits
|
|
|
146,153
|
|
|
|
120,616
|
|
|
106,693
|
|
Gain on Sale of Mortgage Loans
|
|
|
22,370
|
|
|
|
28,588
|
|
|
47,281
|
|
Other Mortgage Banking Revenue
|
|
|
3,655
|
|
|
|
5,466
|
|
|
5,121
|
|
Net Investment Securities Gains
|
|
|
17,229
|
|
|
|
34,814
|
|
|
9,701
|
|
Bank-Owned Life Insurance Revenue
|
|
|
35,940
|
|
|
|
37,744
|
|
|
29,134
|
|
Net Derivative LossesDiscontinued Hedges
|
|
|
|
|
|
|
|
|
|
(18,449
|
)
|
Gain on Termination of Debt
|
|
|
14,718
|
|
|
|
|
|
|
|
|
OREO Income
|
|
|
8,975
|
|
|
|
1,496
|
|
|
1,606
|
|
Other
|
|
|
216,893
|
|
|
|
237,507
|
|
|
179,045
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Other Income
|
|
|
748,115
|
|
|
|
729,066
|
|
|
581,686
|
|
|
|
|
|
Other Expense
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and Employee Benefits
|
|
|
723,245
|
|
|
|
659,871
|
|
|
613,394
|
|
Net Occupancy and Equipment
|
|
|
126,896
|
|
|
|
111,977
|
|
|
103,981
|
|
Software Expenses
|
|
|
24,684
|
|
|
|
21,126
|
|
|
18,028
|
|
Processing Charges
|
|
|
131,990
|
|
|
|
135,110
|
|
|
124,226
|
|
Supplies, Printing, Postage and Delivery
|
|
|
42,131
|
|
|
|
42,547
|
|
|
41,293
|
|
Professional Services
|
|
|
72,043
|
|
|
|
42,454
|
|
|
34,068
|
|
Amortization of Intangibles
|
|
|
24,282
|
|
|
|
20,551
|
|
|
18,643
|
|
Goodwill Impairment
|
|
|
1,535,144
|
|
|
|
|
|
|
|
|
Loss on Termination of Debt
|
|
|
|
|
|
|
83,662
|
|
|
|
|
OREO Expenses
|
|
|
83,212
|
|
|
|
8,184
|
|
|
3,336
|
|
Other
|
|
|
230,478
|
|
|
|
189,461
|
|
|
126,573
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Other Expense
|
|
|
2,994,105
|
|
|
|
1,314,943
|
|
|
1,083,542
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) Before Income Taxes
|
|
|
(2,502,987
|
)
|
|
|
710,580
|
|
|
955,149
|
|
Provision (Benefit) for Income Taxes
|
|
|
(459,525
|
)
|
|
|
213,641
|
|
|
307,435
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) from Continuing Operations
|
|
|
(2,043,462
|
)
|
|
|
496,939
|
|
|
647,714
|
|
Income from Discontinued Operations, Net of Tax
|
|
|
|
|
|
|
653,997
|
|
|
160,124
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss)
|
|
$
|
(2,043,462
|
)
|
|
$
|
1,150,936
|
|
$
|
807,838
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Dividends
|
|
|
(12,737
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) Available to Common Shareholders
|
|
$
|
(2,056,199
|
)
|
|
$
|
1,150,936
|
|
$
|
807,838
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Common Share
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
Continuing Operations
|
|
$
|
(7.92
|
)
|
|
$
|
1.91
|
|
$
|
2.60
|
|
Discontinued Operations
|
|
|
|
|
|
|
2.51
|
|
|
0.64
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss)
|
|
$
|
(7.92
|
)
|
|
$
|
4.42
|
|
$
|
3.24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
Continuing Operations
|
|
$
|
(7.92
|
)
|
|
$
|
1.87
|
|
$
|
2.54
|
|
Discontinued Operations
|
|
|
|
|
|
|
2.47
|
|
|
0.63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss)
|
|
$
|
(7.92
|
)
|
|
$
|
4.34
|
|
$
|
3.17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes
are an integral part of the Consolidated Financial Statements.
70
Consolidated Statements of Cash Flows
Years ended December 31 ($000s)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Cash Flows From Operating Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss)
|
|
$
|
(2,043,462
|
)
|
|
$
|
1,150,936
|
|
|
$
|
807,838
|
|
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and Amortization
|
|
|
9,248
|
|
|
|
133,099
|
|
|
|
171,093
|
|
Provision for Loan and Lease Losses
|
|
|
2,037,707
|
|
|
|
319,760
|
|
|
|
50,551
|
|
Provision (Benefit) for Deferred Income Taxes
|
|
|
(284,777
|
)
|
|
|
(21,818
|
)
|
|
|
47,299
|
|
Stockbased Compensation Expense
|
|
|
30,757
|
|
|
|
46,923
|
|
|
|
39,775
|
|
Excess Tax Expense (Benefit) from Stock-based Compensation Arrangements
|
|
|
55
|
|
|
|
(4,251
|
)
|
|
|
(11,430
|
)
|
Net Gain on Sales of Assets
|
|
|
(87,026
|
)
|
|
|
(101,315
|
)
|
|
|
(32,771
|
)
|
(Gain) Loss on Termination of Debt
|
|
|
(14,718
|
)
|
|
|
83,662
|
|
|
|
|
|
Gain on Sale of Metavante
|
|
|
|
|
|
|
(525,576
|
)
|
|
|
|
|
Proceeds from Sales of Trading Securities and Loans Held for Sale
|
|
|
9,536,138
|
|
|
|
9,509,819
|
|
|
|
12,599,298
|
|
Purchases of Trading Securities and Loans Held for Sale
|
|
|
(9,217,732
|
)
|
|
|
(9,150,076
|
)
|
|
|
(12,282,292
|
)
|
BankOwned Life Insurance Revenue
|
|
|
(34,371
|
)
|
|
|
(36,731
|
)
|
|
|
(27,677
|
)
|
Writedown of OREO
|
|
|
55,582
|
|
|
|
1,337
|
|
|
|
188
|
|
Goodwill Impairment
|
|
|
1,535,144
|
|
|
|
|
|
|
|
|
|
Change in Accrued Interest and Other Assets
|
|
|
(320,319
|
)
|
|
|
(94,680
|
)
|
|
|
(195,753
|
)
|
Change in Accrued Expenses and Other Liabilities
|
|
|
(444,996
|
)
|
|
|
(347,215
|
)
|
|
|
(317,299
|
)
|
Other
|
|
|
39,318
|
|
|
|
(10,337
|
)
|
|
|
(3,924
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Adjustments
|
|
|
2,840,010
|
|
|
|
(197,399
|
)
|
|
|
37,058
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash Provided by Operating Activities
|
|
|
796,548
|
|
|
|
953,537
|
|
|
|
844,896
|
|
|
|
|
|
Cash Flows From Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from Sales of Securities Available for Sale
|
|
|
129,650
|
|
|
|
883,812
|
|
|
|
609,008
|
|
Proceeds from Sales of Securities Held to Maturity
|
|
|
1,633
|
|
|
|
|
|
|
|
|
|
Proceeds from Maturities of Securities Available for Sale
|
|
|
1,219,955
|
|
|
|
1,355,466
|
|
|
|
1,193,940
|
|
Proceeds from Maturities of Securities Held to Maturity
|
|
|
136,847
|
|
|
|
121,741
|
|
|
|
124,286
|
|
Purchases of Securities Available for Sale
|
|
|
(1,084,387
|
)
|
|
|
(2,449,500
|
)
|
|
|
(2,229,324
|
)
|
Net Increase in Loans
|
|
|
(3,736,839
|
)
|
|
|
(4,051,448
|
)
|
|
|
(3,957,011
|
)
|
Proceeds from Loan to Metavante
|
|
|
|
|
|
|
982,000
|
|
|
|
|
|
Purchases of Assets to be Leased
|
|
|
(263,421
|
)
|
|
|
(327,396
|
)
|
|
|
(260,939
|
)
|
Principal Payments on Lease Receivables
|
|
|
258,126
|
|
|
|
345,569
|
|
|
|
234,445
|
|
Purchases of Premises and Equipment, Net
|
|
|
(101,657
|
)
|
|
|
(87,646
|
)
|
|
|
(104,911
|
)
|
Cash Paid for Acquisitions, Net of Cash and Cash Equivalents Acquired
|
|
|
(476,761
|
)
|
|
|
(33,298
|
)
|
|
|
(130,385
|
)
|
Proceeds (Payments) from Divestitures
|
|
|
2,460
|
|
|
|
80,074
|
|
|
|
(7,554
|
)
|
Net Proceeds from the Separation
|
|
|
|
|
|
|
1,592,646
|
|
|
|
|
|
Purchase of Bank-Owned Life Insurance
|
|
|
|
|
|
|
(286,629
|
)
|
|
|
|
|
Net Proceeds from Sale of OREO
|
|
|
86,069
|
|
|
|
50,495
|
|
|
|
13,301
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash Used in Investing Activities
|
|
|
(3,828,325
|
)
|
|
|
(1,824,114
|
)
|
|
|
(4,515,144
|
)
|
|
|
|
|
Cash Flows From Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Increase (Decrease) in Deposits
|
|
|
4,223,022
|
|
|
|
(550,558
|
)
|
|
|
2,701,936
|
|
Proceeds from Issuance of Commercial Paper
|
|
|
33,741,932
|
|
|
|
19,190,183
|
|
|
|
5,326,917
|
|
Principal Payments on Commercial Paper
|
|
|
(34,523,654
|
)
|
|
|
(18,912,746
|
)
|
|
|
(5,185,918
|
)
|
Net Increase (Decrease) in Other Short-term Borrowings
|
|
|
(2,076,047
|
)
|
|
|
1,619,223
|
|
|
|
(106,539
|
)
|
Proceeds from Issuance of Long-term Borrowings
|
|
|
1,282,056
|
|
|
|
3,220,316
|
|
|
|
2,448,752
|
|
Payment of Long-term Borrowings
|
|
|
(1,649,724
|
)
|
|
|
(3,122,833
|
)
|
|
|
(1,225,554
|
)
|
Dividends Paid on Common Stock
|
|
|
(327,820
|
)
|
|
|
(313,298
|
)
|
|
|
(261,535
|
)
|
Purchases of Common Stock
|
|
|
(130,870
|
)
|
|
|
(431,150
|
)
|
|
|
(41,791
|
)
|
Proceeds from the Issuance of Preferred Stock
|
|
|
1,715,000
|
|
|
|
|
|
|
|
|
|
Proceeds from the Issuance of Common Stock
|
|
|
27,832
|
|
|
|
112,254
|
|
|
|
84,042
|
|
Proceeds from Issuance of Common Stock Stock Purchase Contracts
|
|
|
|
|
|
|
399,989
|
|
|
|
|
|
Excess Tax (Expense) Benefit from Stock-based Compensation Arrangements
|
|
|
(55
|
)
|
|
|
4,251
|
|
|
|
11,430
|
|
Other
|
|
|
|
|
|
|
(7,800
|
)
|
|
|
(10,585
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash Provided by Financing Activities
|
|
|
2,281,672
|
|
|
|
1,207,831
|
|
|
|
3,741,155
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (Decrease) Increase in Cash and Cash Equivalents
|
|
|
(750,105
|
)
|
|
|
337,254
|
|
|
|
70,907
|
|
Cash and Cash Equivalents Beginning of Year
|
|
|
1,822,512
|
|
|
|
1,485,258
|
|
|
|
1,414,351
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents End of Year
|
|
|
1,072,407
|
|
|
|
1,822,512
|
|
|
|
1,485,258
|
|
Cash and Cash Equivalents of Discontinued Operations
|
|
|
|
|
|
|
|
|
|
|
(46,178
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents from Continuing Operations, End of Year
|
|
$
|
1,072,407
|
|
|
$
|
1,822,512
|
|
|
$
|
1,439,080
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Cash Flow Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Paid During the Year for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
1,509,961
|
|
|
$
|
2,041,724
|
|
|
$
|
1,625,191
|
|
Income Taxes
|
|
|
63,693
|
|
|
|
277,474
|
|
|
|
362,451
|
|
The accompanying notes
are an integral part of the Consolidated Financial Statements.
71
Consolidated Statements of Shareholders Equity
($000s except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compre-
hensive
Income
|
|
|
Preferred
Stock
|
|
Common
Stock
|
|
Additional
Paid-In
Capital
|
|
|
Retained
Earnings
|
|
|
Treasury
Common
Stock
|
|
|
Deferred
Compen-
sation
|
|
|
Accumula-
ted Other
Compre-
hensive
Income
|
|
Balance, December 31, 2005
|
|
|
|
|
|
$
|
|
|
$
|
244,587
|
|
$
|
970,739
|
|
|
$
|
3,837,339
|
|
|
$
|
(277,423
|
)
|
|
$
|
(36,755
|
)
|
|
$
|
(21,061
|
)
|
Comprehensive Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
807,838
|
|
|
|
|
|
|
|
|
|
|
|
|
|
807,838
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized Gains (Losses) on Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Arising During the Period, Net of Taxes of ($9,682)
|
|
|
17,562
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification for Securities Transactions Included in Net Income, Net of Taxes of $1,768
|
|
|
(3,283
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Unrealized Gains (Losses) on Securities
|
|
|
14,279
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,279
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Gains (Losses) on Derivatives Hedging Variability of Cash Flows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Arising During the Period, Net of Taxes of $475
|
|
|
(882
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification Adjustments For Hedging Activities Included in Net Income, Net of Taxes of $7,930
|
|
|
(14,727
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Gains (Losses)
|
|
|
(15,609
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(15,609
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Comprehensive Income
|
|
|
(1,330
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Comprehensive Income
|
|
$
|
806,508
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment to Initially Apply SFAS 158, Net of Tax of ($2,854)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,845
|
|
Issuance of 17,269,857 Common Shares in the 2006 Business Combinations
|
|
|
|
|
|
|
|
|
|
17,385
|
|
|
763,054
|
|
|
|
|
|
|
|
(5,099
|
)
|
|
|
|
|
|
|
|
|
Issuance of 3,434,187 Treasury Common Shares Under Stock Option and Restricted Stock Plans
|
|
|
|
|
|
|
|
|
|
|
|
|
(20,108
|
)
|
|
|
|
|
|
|
108,269
|
|
|
|
(391
|
)
|
|
|
|
|
Issuance of 385,192 Treasury Common Shares for Retirement Plan Funding
|
|
|
|
|
|
|
|
|
|
|
|
|
4,819
|
|
|
|
|
|
|
|
12,130
|
|
|
|
|
|
|
|
|
|
Acquisition of 1,058,273 Common Shares
|
|
|
|
|
|
|
|
|
|
|
|
|
1,109
|
|
|
|
|
|
|
|
(43,815
|
)
|
|
|
|
|
|
|
|
|
Dividends Declared on Common Stock$1.05 Per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(261,535
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Change in Deferred Compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,153
|
)
|
|
|
|
|
Income Tax Benefit for Compensation Expense for Tax Purposes in Excess of Amounts Recognized for Financial Reporting Purposes
|
|
|
|
|
|
|
|
|
|
|
|
|
11,430
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Based Compensation Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
39,775
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
(278
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2006
|
|
|
|
|
|
$
|
|
|
$
|
261,972
|
|
$
|
1,770,540
|
|
|
$
|
4,383,642
|
|
|
$
|
(205,938
|
)
|
|
$
|
(41,299
|
)
|
|
$
|
(17,546
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes
are an integral part of the Consolidated Financial Statements.
72
Consolidated Statements of Shareholders Equity
($000s except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compre-
hensive
Income
|
|
|
Preferred
Stock
|
|
Common
Stock
|
|
|
Additional
Paid-In
Capital
|
|
|
Retained
Earnings
|
|
|
Treasury
Common
Stock
|
|
|
Deferred
Compen-
sation
|
|
|
Accumula-
ted Other
Compre-
hensive
Income
|
|
Balance, December 31, 2006
|
|
|
|
|
|
$
|
|
|
$
|
261,972
|
|
|
$
|
1,770,540
|
|
|
$
|
4,383,642
|
|
|
$
|
(205,938
|
)
|
|
$
|
(41,299
|
)
|
|
$
|
(17,546
|
)
|
Comprehensive Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
1,150,936
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,150,936
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized Gains (Losses) on Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Arising During the Period, Net of Taxes of ($10,885)
|
|
|
19,765
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification for Securities Transactions Included in Net Income, Net of Taxes of $4,352
|
|
|
(8,081
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Unrealized Gains (Losses) on Securities
|
|
|
11,684
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,684
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Gains (Losses) on Derivatives Hedging Variability of Cash Flows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Arising During the Period, Net of Taxes of $19,671
|
|
|
(36,531
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification Adjustments For Hedging Activities Included in Net Income, Net of Taxes of $5,369
|
|
|
(9,971
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Gains (Losses)
|
|
|
(46,502
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(46,502
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized Gains (Losses) on Funded Status of Defined Benefit Postretirement Plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect due to Remeasurement of Benefit Obligation, Net of Taxes of $382
|
|
|
(604
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change Related to the Separation, Net of Taxes of ($262)
|
|
|
358
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(358
|
)
|
Reclassification Adjustments for Amortization of Actuarial Loss and Prior Service Credit Amortization Included in Net Income, Net of Taxes of
$635
|
|
|
(1,097
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Gains (Losses)
|
|
|
(1,343
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,343
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Comprehensive Income
|
|
|
(36,161
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Comprehensive Income
|
|
$
|
1,114,775
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in connection with the Separation
|
|
|
|
|
|
|
|
|
|
(8,596
|
)
|
|
|
(346,405
|
)
|
|
|
(298,272
|
)
|
|
|
351,705
|
|
|
|
2,938
|
|
|
|
358
|
|
Issuance of 9,226,951 Common Shares Under STACKS/SPACES
|
|
|
|
|
|
|
|
|
|
9,227
|
|
|
|
390,762
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of 4,851,899 Common Shares in the 2007 Business Combinations
|
|
|
|
|
|
|
|
|
|
4,852
|
|
|
|
239,526
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of 4,436,659 Treasury Common Shares Under Stock Option and Restricted Stock Plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(50,327
|
)
|
|
|
|
|
|
|
161,570
|
|
|
|
|
|
|
|
|
|
Issuance of 403,508 Treasury Common Shares for Retirement Plan Funding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,343
|
|
|
|
|
|
|
|
12,836
|
|
|
|
|
|
|
|
|
|
Acquisition of 10,792,502 Common Shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,255
|
)
|
|
|
|
|
|
|
(438,114
|
)
|
|
|
|
|
|
|
|
|
Dividends Declared on Common Stock$1.20 Per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(313,298
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Change in Deferred Compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,998
|
)
|
|
|
|
|
Income Tax Benefit for Compensation Expense for Tax Purposes in Excess of Amounts Recognized for Financial Reporting Purposes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,251
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Based Compensation Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46,923
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(85
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2007
|
|
|
|
|
|
$
|
|
|
$
|
267,455
|
|
|
$
|
2,059,273
|
|
|
$
|
4,923,008
|
|
|
$
|
(117,941
|
)
|
|
$
|
(45,359
|
)
|
|
$
|
(53,707
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes
are an integral part of the Consolidated Financial Statements.
73
Consolidated Statements of Shareholders Equity
($000s except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compre-
hensive
Income
|
|
|
Preferred
Stock
|
|
Common
Stock
|
|
Additional
Paid-In
Capital
|
|
|
Retained
Earnings
|
|
|
Treasury
Common
Stock
|
|
|
Deferred
Compen-
sation
|
|
|
Accumula-
ted Other
Compre-
hensive
Income
|
|
Balance, December 31, 2007
|
|
|
|
|
|
$
|
|
|
$
|
267,455
|
|
$
|
2,059,273
|
|
|
$
|
4,923,008
|
|
|
$
|
(117,941
|
)
|
|
$
|
(45,359
|
)
|
|
$
|
(53,707
|
)
|
Comprehensive Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(2,043,462
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,043,462
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized Gains (Losses) on Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Arising During the Period, Net of Taxes of $24,649
|
|
|
(46,566
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification for Securities Transactions Included in Net Income, Net of Taxes of $112
|
|
|
(208
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Unrealized Gains (Losses) on Securities
|
|
|
(46,774
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(46,774
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Gains (Losses) on Derivatives Hedging Variability of Cash Flows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Arising During the Period, Net of Taxes of $43,579
|
|
|
(80,934
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification Adjustments For Hedging Activities Included in Net Income, Net of Taxes of ($13,528)
|
|
|
25,124
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Gains (Losses)
|
|
|
(55,810
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(55,810
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized Gains (Losses) on Funded Status of Defined Benefit Postretirement Plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect due to Remeasurement of Benefit Obligation, Net of Taxes of $4,524
|
|
|
(358
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification Adjustments for Amortization of Actuarial Loss and Prior Service Credit Amortization Included in Net Income, Net of Taxes of
$767
|
|
|
(1,303
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Gains (Losses)
|
|
|
(1,661
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,661
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Comprehensive Income
|
|
|
(104,245
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Comprehensive Income
|
|
$
|
(2,147,707
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of 1,715,000 Preferred Shares Under U.S. Treasury Capital Purchase Program
|
|
|
|
|
|
|
1,715
|
|
|
|
|
|
1,713,285
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of 4,863,221 Common Shares in the 2008 Business Combination
|
|
|
|
|
|
|
|
|
|
4,864
|
|
|
59,136
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of 1,918,432 Treasury Common Shares Under Stock Option and Restricted Stock Plans
|
|
|
|
|
|
|
|
|
|
|
|
|
(25,668
|
)
|
|
|
|
|
|
|
53,311
|
|
|
|
|
|
|
|
|
|
Acquisition of 4,927,215 Common Shares
|
|
|
|
|
|
|
|
|
|
|
|
|
383
|
|
|
|
|
|
|
|
(128,330
|
)
|
|
|
|
|
|
|
|
|
Dividends Declared on Preferred Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
1,780
|
|
|
|
(12,737
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends Declared on Common Stock$1.27 Per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(327,820
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Change in Deferred Compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,562
|
|
|
|
|
|
Income Tax Benefit for Compensation Expense for Tax Purposes in Excess of Amounts Recognized for Financial Reporting Purposes
|
|
|
|
|
|
|
|
|
|
|
|
|
(55
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Based Compensation Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
30,757
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
(24
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2008
|
|
|
|
|
|
$
|
1,715
|
|
$
|
272,319
|
|
$
|
3,838,867
|
|
|
$
|
2,538,989
|
|
|
$
|
(192,960
|
)
|
|
$
|
(40,797
|
)
|
|
$
|
(157,952
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes
are an integral part of the Consolidated Financial Statements.
74
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006 ($000s except share data)
Marshall & Ilsley Corporation (M&I or
the Corporation) is a financial holding company that provides diversified financial services to a wide variety of corporate, institutional, government and individual customers. M&Is largest affiliates and principal operations
are in Wisconsin; however, it has activities in other markets, particularly in certain neighboring Midwestern states, and in Arizona, Nevada and Florida. The Corporations principal activities consist of banking and wealth management services.
Banking services, lending and accepting deposits from commercial banking and community banking customers are provided through its lead bank, M&I Marshall & Ilsley Bank (M&I Bank), which is headquartered in Wisconsin, one
federally chartered thrift headquartered in Nevada, one state chartered bank headquartered in St. Louis, Missouri, and an asset-based lending subsidiary headquartered in Minneapolis, Minnesota. In addition to branches located throughout Wisconsin,
banking services are provided in branches located throughout Arizona, the Minneapolis, Minnesota, Kansas City, Missouri and St. Louis, Missouri metropolitan areas, Duluth, Minnesota, Belleville, Illinois, Las Vegas, Nevada, Florida and central
Indiana, as well as on the Internet. Wealth Management, which includes Marshall & Ilsley Trust Company National Association (M&I Trust), M&I Brokerage Services, Inc., the private banking divisions of the
Corporations bank subsidiaries and other subsidiaries related to the wealth management business, provides trust services, brokerage and insurance services, and investment management and advisory services to residents of Wisconsin, Arizona,
Minnesota, Missouri, Florida, Nevada and Indiana. Other financial services provided by M&I include personal property lease financing, wholesale lending, investment services to institutional clients and venture capital.
1. Basis of Presentation and Summary of Significant Accounting Policies
Estimates
The preparation of financial statements in conformity
with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses during the reported periods. Actual results could differ from those estimates.
Consolidation principles
The Consolidated Financial Statements include the accounts of the Corporation, its subsidiaries that are wholly or
majority owned and/or over which it exercises substantive control and significant variable interest entities for which the Corporation has determined that, based on the variable interests it holds, it is the primary beneficiary in accordance with
Financial Accounting Standards Board (FASB) Interpretation No. 46 (FIN 46R),
Consolidation of Variable Interest Entities an interpretation of Accounting Research Board No. 51 (revised December 2003)
.
The primary beneficiary of a variable interest entity is the party that absorbs a majority of an entitys expected losses, receives a majority of an entitys expected residual returns, or both, as a result of holding variable interests.
Variable interests are the ownership, contractual or other pecuniary interests in an entity. Investments in unconsolidated affiliates, in which the Corporation has 20 percent or more ownership interest and has the ability to exercise significant
influence, but not substantive control, over the affiliates operating and financial policies, are accounted for using the equity method of accounting, unless the investment has been determined to be temporary. All intercompany balances and
transactions are eliminated in consolidation.
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 facilities. These facilities
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 No. 140 (SFAS 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 have the ability to sell or dispose of non-cash financial assets only in response to specified conditions.
75
Notes to Consolidated Financial Statements(Continued)
December 31, 2008, 2007, and 2006 ($000s except share data)
Cash and Cash Equivalents
For purposes of the
Consolidated Financial Statements, the Corporation defines cash and cash equivalents as short-term investments, which have an original maturity of three months or less and are readily convertible into cash. At December 31, 2008 and 2007,
$82,963 and $62,108, respectively, of cash and due from banks was restricted, primarily due to requirements of the Federal Reserve System to maintain certain reserve balances.
Trading Assets
Trading assets include trading securities and trading and other free-standing derivative
contracts. Trading securities are designated as trading when purchased and are held principally for sale in the near term. Trading and other 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,
Accounting for Derivative Instruments and Hedging Activities
(SFAS 133). Trading and other
free-standing derivative contracts are carried at fair value with changes in fair value recorded in the Consolidated Statements of Income.
Investment Securities
Securities, when purchased, are designated as Investment Securities Available for Sale or Investment Securities Held to
Maturity, and remain in that category until they are sold or mature. The specific identification method is used in determining the cost of securities sold. Investment Securities Held to Maturity are carried at cost, adjusted for amortization of
premiums and accretion of discounts. The Corporation designates investment securities as held to maturity only when it has the positive intent and ability to hold them to maturity. All other securities are classified as Investment Securities
Available for Sale and are carried at fair value with fair value adjustments net of the related income tax effects reported as a component of Accumulated Other Comprehensive Income in the Consolidated Balance Sheets.
Loans Held for Sale
Loans that the Corporation originates and
intends to sell or securitize are reported as loans held for sale and are carried at the lower of cost or market (LOCOM) value. Any excess of the cost of a loan held for sale over its market value is recognized as a valuation allowance,
with changes in the valuation allowance recognized in the Consolidated Statements of Income. Purchase premiums, discounts and/or other loan basis adjustments on loans held for sale are deferred upon acquisition, included in the cost basis of the
loan, and are not amortized. The Corporation determines any LOCOM adjustment on loans held for sale on a pool basis by aggregating those loans based on similar risks and other characteristics, such as product types and interest rates. The market
value of loans held for sale is generally based on whole loan sale prices if formally committed or observable market prices of securities that have loan collateral or interests in loans that are similar to the loans held for sale. If market prices
are not readily available, the market value is based on a discounted cash flow model, which takes into account the degree of credit risk associated with the loans and the estimated effects of changes in market interest rates relative to the
loans interest rates.
In the event that loans held for
sale are reclassified to loans held in portfolio, the loans are transferred at LOCOM on the date of transfer, forming the new cost basis of such loans. Any LOCOM adjustment recognized upon transfer is recognized as a basis adjustment to the
portfolio loan. For reclassifications of loans held in portfolio to loans held for sale, the loan is transferred from loans held in portfolio to loans held for sale at LOCOM. If the change in market value on these loans is due to credit concern on
such loans, the loans are reclassified net of the portion of the allowance for loan losses that is attributable to the transferred loans, with a corresponding reduction in the allowance for loan losses. The cash proceeds from the sale of loans that
were reclassified from loans held in portfolio to loans held for sale are classified as investing activities in the Consolidated Statement of Cash Flows.
Loans and leases
Interest on loans, other than direct financing leases, is recognized as income based on the loan principal outstanding during
the period. Unearned income on financing leases is recognized over the lease term on a basis that results in an approximate level rate of return on the lease investment. The Corporation considers a loan to be impaired when, based on current
information and events, it determines that it is probable it will be unable to collect all amounts due, including scheduled interest, according to the loans original loan contract. When a loan is past due 90 days as to either interest or
principal, it is generally placed on nonaccrual status. When a loan is placed on nonaccrual status, previously accrued and uncollected interest is charged to interest and fee income on loans. A nonaccrual loan may be restored to an accrual basis
when interest and principal payments are brought current and collectibility of future
76
Notes to Consolidated Financial Statements(Continued)
December 31, 2008, 2007, and 2006 ($000s except share data)
payments is not in doubt. The Corporation classifies certain loans as renegotiated in cases where a borrower experiences financial difficulties and the
Corporation makes certain modifications to contractual terms. Loans renegotiated at a rate equal to or greater than that of a new loan with comparable risk at the time the contract is modified are excluded from renegotiated loans in the calendar
years subsequent to the renegotiation if the loan is in compliance with the modified terms.
The Corporation defers and amortizes fees and certain incremental direct costs, primarily salary and employee benefit expenses, over the contractual term of the loan or lease as an adjustment to the yield. The
unamortized net fees and costs are reported as part of the loan or lease balance outstanding.
The Corporation periodically reviews the residual values associated with its leasing portfolios. Declines in residual values that are judged to be other than temporary are recognized as a loss resulting in a reduction
in the net investment in the lease.
Allowance for loan and
lease losses
The allowance for loan and lease losses is maintained at a level believed adequate by management to absorb estimated losses inherent in the loan and lease portfolio including loans that have been determined to be impaired. For
nonaccrual loans greater than an established threshold and all renegotiated loans, impairment is measured using one of three alternatives: (1) the present value of expected future cash flows discounted at the loans effective interest
rate; (2) the loans 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. Loans below the established thresholds are
evaluated as homogenous pools. Managements determination of the adequacy of the allowance is based on a continual review of the loan and lease portfolio, loan and lease loss experience, economic conditions, growth and composition of the
portfolio, and other relevant factors. As a result of managements continual review, the allowance is adjusted through provisions for loan and lease losses charged against income.
Financial asset sales
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 provides
additional credit support by maintaining cash reserve accounts. 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 managements best estimates of the key assumptions credit losses, prepayment speeds, forward
yield curves and discount rates commensurate with the risks involved.
Premises and equipment
Land is recorded at cost. Premises and equipment are recorded at cost and depreciated principally on the straight-line method with annual rates varying from 10 to 50 years for buildings and 3 to 10 years
for equipment. Long-lived assets which are impaired are written down to fair value and long-lived assets to be disposed of are carried at the lower of the carrying amount or fair value less cost to sell. Maintenance and repairs are charged to
expense and betterments are capitalized.
Goodwill and Other
Intangible Assets
Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets
, (SFAS 142) adopts an aggregate view of goodwill and bases the accounting for goodwill on the units
of the combined entity into which an acquired entity is integrated (those units are referred to as Reporting Units). A Reporting Unit is an operating segment as defined in Statement of Financial Accounting Standards No. 131,
Disclosures
about Segments of an Enterprise and Related Information
, or one level below an operating segment.
SFAS 142 provides guidance for impairment testing of goodwill and intangible assets that are not amortized. Goodwill is tested for impairment using a
two-step process that begins with an estimation of the fair value of a Reporting Unit. The first step is a screen for potential impairment and the second step measures the amount of impairment, if any. The Corporation tests goodwill for impairment
annually. See Note 11 Goodwill and Other Intangibles in Notes to Consolidated Financial Statements for additional information.
77
Notes to Consolidated Financial Statements(Continued)
December 31, 2008, 2007, and 2006 ($000s except share data)
Identifiable intangibles arising from purchase acquisitions
with a finite useful life are amortized over their useful lives and consist of core deposit intangibles, customer lists, tradename and other intangibles.
Identifiable intangibles that have been determined to have an indefinite useful life are not amortized but are subject to periodic tests for impairment.
At December 31, 2008 and 2007, the Corporation did not have any identifiable intangibles that have been determined to have an indefinite useful life.
Bank-Owned Life Insurance
(BOLI)
The Corporation purchases life insurance policies on the lives of certain officers and
employees and is the owner and beneficiary of the policies. The Corporations investments in these policies are intended to provide funding for future employee benefit costs. The Corporation records these BOLI policies at each policys
respective cash surrender value, with changes recorded in Bank-Owned Life Insurance Revenue in the Consolidated Statements of Income. Certain BOLI policies have a stable value agreement through either a large, well-rated bank or multi-national
insurance carrier that provides limited cash surrender value protection from declines in the value of each policys underlying investments. During the fourth quarter of 2008, the value of the investments underlying one of the Corporations
BOLI policies declined significantly due to disruptions in the credit markets, widening of credit spreads and illiquidity in the securities market. These factors caused the decline in the cash surrender value to exceed the protection provided by the
stable value agreement. As a result of exceeding the cash surrender value protection, the Corporation recorded a loss of $11.8 million to reflect the change in cash surrender value related to the affected BOLI policy. The cash surrender value of
this BOLI policy was $238.3 million at December 31, 2008. The cash surrender value of this policy may increase or decrease further depending on market conditions related to the underlying investments. At December 31, 2008, the cash
surrender value protection had not been exceeded for any other BOLI policies.
Other real estate owned
(OREO)
Other real estate owned consists primarily of assets that have been acquired in satisfaction of debts. Other real estate owned is recorded at fair value,
less estimated selling costs, at the date of transfer. Valuation adjustments required at the date of transfer for assets acquired in satisfaction of debts are charged to the allowance for loan and lease losses. During 2008, 2007 and 2006, loans
transferred to OREO amounted to $400,746, $141,046 and $25,934, respectively. These amounts are considered non-cash transactions for the purposes of the Consolidated Statements of Cash Flow. Subsequent to transfer, other real estate owned is carried
at the lower of cost or fair value, less estimated selling costs, based upon periodic evaluations. OREO Income, in the Consolidated Statements of Income, includes rental income from properties and gains on sales. Property expenses, which include
carrying costs, required valuation adjustments and losses on sales, are recorded in OREO Expenses in the Consolidated Statements of Income.
Derivative financial instruments
Derivative financial instruments, including certain derivative instruments embedded in other contracts, are
carried in the Consolidated Balance Sheets as either an asset or liability measured at its fair value. The fair value of the Corporations derivative financial instruments is determined based on market prices for comparable transactions, if
available, or a valuation model that calculates the present value of expected future cash flows.
Changes in the fair value of derivative financial instruments are recognized currently in earnings unless specific hedge accounting criteria are met. For
derivative financial instruments designated as hedging the exposure to changes in the fair value of a recognized asset or liability (fair value hedge), the gain or loss is recognized in earnings in the period of change together with the offsetting
loss or gain on the hedged item attributable to the risk being hedged. For derivative financial instruments designated as hedging the exposure to variable cash flows of a forecasted transaction (cash flow hedge), the effective portion of the
derivative financial instruments gain or loss is initially reported as a component of accumulated other comprehensive income and is subsequently reclassified into earnings when the forecasted transaction affects earnings. The ineffective
portion of the gain or loss is reported in earnings immediately.
At inception of a hedge, the Corporation formally documents the hedging relationship as well as the Corporations risk management objective and strategy for undertaking the hedge, including identification of the hedging instrument, the
hedged transaction, the nature of the risk being hedged, and how the hedging instruments effectiveness in hedging the exposure will be assessed.
78
Notes to Consolidated Financial Statements(Continued)
December 31, 2008, 2007, and 2006 ($000s except share data)
The adjustment of the carrying amount of an interest bearing
hedged asset or liability in a fair value hedge is amortized into earnings when the hedged item ceases to be adjusted for changes in its fair value attributable to the risk being hedged.
If a cash flow hedge is discontinued because it is probable that the original forecasted transaction will not occur, the net
gain or loss in accumulated other comprehensive income is immediately reclassified into earnings. If the cash flow hedge is sold, terminated, expires or the designation of the cash flow hedge is removed, the net gain or loss in accumulated other
comprehensive income is reclassified into earnings in the same period or periods during which the hedged forecasted transaction affects earnings.
Cash flows from derivative financial instruments are reported in the Consolidated Statements of Cash Flows as operating activities.
Foreign exchange contracts
Foreign exchange contracts include
such commitments as foreign currency spot, forward, future and option contracts. Foreign exchange contracts and the premiums on options written or sold are carried at market value with changes in market value included in other income.
Treasury stock
Treasury stock acquired is recorded at cost and is
carried as a reduction of shareholders equity in the Consolidated Balance Sheets. Treasury stock issued is valued based on average cost. The difference between the consideration received upon issuance and the average cost is charged or
credited to additional paid-in capital.
New accounting
pronouncements
In January 2009, the Financial Accounting Standards Board (FASB) issued FASB Staff Position (FSP) No. EITF 99-20-1,
Amendments to the Impairment Guidance of EITF Issue No. 99-20
(FSP EITF 99-20-1). This FSP amends impairment guidance for investment securities that are beneficial interests in securitized financial assets that are of a lower quality and could contractually be prepaid or otherwise settled
in such a way that the holder would not recover substantially all of its recorded investment to be more consistent with other related impairment guidance. The FSP was effective as of December 31, 2008 and applied prospectively by the
Corporation. The adoption of FSP EITF 99-20-1 did not have a significant impact to the Corporations consolidated financial statements.
In December 2008, the FASB issued FSP No. FAS 132(R)-1 (FSP 132(R)-1),
Employers Disclosures about Postretirement Benefit Plan
Assets
. FSP 132(R)-1 requires additional disclosure regarding plan assets held in an employers defined benefit pension or other postretirement plan to provide disclosures regarding investment allocations, major categories of plan
assets, valuation techniques used to measure the fair value of plan assets, the effect of fair value measurements using significant unobservable inputs (Level 3) on changes in plan assets for the period and significant concentrations of risk within
plan assets. FSP 132(R)-1 is effective for years ending after December 15, 2009. Earlier application of the provisions of this FSP is permitted. The Corporation adopted FSP 132(R)-1 effective December 31, 2008. See Note 18Employee
Retirement and Health Plans in Notes to Consolidated Financial Statements for further information.
In September 2008, the FASB ratified EITF Issue No. 08-5 (EITF Issue 08-5),
Issuers Accounting for Liabilities Measured at
Fair Value with a Third-Party Credit Enhancement
. Under EITF Issue 08-5 the measurement or disclosure of the fair value of a liability, such as debt, issued with an inseparable financial guarantee of payment from a third-party should not
include the effect of the credit enhancement. Thus, the liabilitys fair value is determined considering the issuers credit standing without regard to the effect of the third-party credit enhancement. EITF Issue 08-5 does not apply to a
credit enhancement provided by the government or government agencies (for example, deposit insurance or debt guaranteed under the FDICs Temporary Liquidity Guarantee Program) or a credit enhancement provided between a parent and its
subsidiary. The effect of initially applying EITF Issue 08-5 should be included in the change in fair value in the year of adoption. EITF Issue 08-5 was effective on a prospective basis on January 1, 2009. Earlier application was not permitted.
As the Corporation has not issued liabilities with inseparable financial guarantees within the scope of EITF Issue 08-5, the adoption of EITF Issue 08-5 did not have a significant impact on its financial statements and related disclosures.
79
Notes to Consolidated Financial Statements(Continued)
December 31, 2008, 2007, and 2006 ($000s except share data)
In June 2008, the FASB issued FSP No. EITF 03-6-1 (FSP
EITF 03-6-1),
Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities
. Under FSP EITF 03-6-1, unvested share-based payment awards that provide nonforfeitable rights to dividends
are considered participating securities to be included in the computation of earnings per share pursuant to the two-class method described in FASB Statement No. 128,
Earnings per Share
. FSP EITF 03-6-1 was effective for the
Corporation on January 1, 2009. Once effective, all prior period earnings per share data presented must be adjusted retrospectively to conform to the provisions of the FSP. Early application was not permitted. The Corporation does not expect
the adoption of FSP EITF 03-6-1 will have a significant impact on its financial statements and related disclosures.
In May 2008, the FASB issued Statement of Financial Accounting Standards No. 162,
The Hierarchy of Generally Accepted Accounting
Principles
(SFAS 162). SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in
conformity with generally accepted accounting principles (GAAP) in the United States. SFAS 162 became effective November 15, 2008. The Corporations adoption of SFAS 162 did not result in a change in current practice.
In April 2008, the FASB issued FSP No. FAS 142-3,
Determination of the
Useful Life of Intangible Assets
(FSP FAS 142-3). FSP FAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset and
provides for enhanced disclosures regarding intangible assets. The intent of this FSP is to improve the consistency between the useful life of a recognized intangible asset and the period of expected cash flows used to measure the fair value of the
asset. The disclosure provisions were effective for all intangibles recorded as of, and subsequent to, January 1, 2009 and the guidance for determining the useful life applies prospectively to all intangible assets acquired after
January 1, 2009. Early adoption was prohibited. The effects of adoption did not have a significant impact on and intangibles recorded at the adoption date.
In March 2008, FASB issued Statement of Financial Accounting Standard No. 161,
Disclosures about Derivative Instruments and Hedging
Activities, an amendment of FASB Statement No. 133
(SFAS 161). SFAS 161 applies to all derivative instruments and related hedged items accounted for under FASB Statement No. 133,
Accounting for Derivative
Instruments and Hedging Activities
(SFAS 133). SFAS 161 amends and expands the disclosures provided under SFAS 133 regarding how and why an entity uses derivative instruments, how derivative instruments and related hedged items
are accounted for under SFAS 133 and its related interpretations, and how derivative instruments and related hedged items affect an entitys financial position, results of operations, and cash flows. The Corporation adopted SFAS 161 effective
December 31, 2008. See Note 21 Derivative Financial Instruments and Hedging Activities in the Notes to Consolidated Financial Statements for additional information.
In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141 (revised 2007),
Business
Combinations
(SFAS 141R). SFAS 141R establishes principles and requirements for how an acquirer in a business combination recognizes and measures in its financial statements the identifiable assets acquired, the liabilities
assumed, goodwill and any noncontrolling interest in the acquiree. SFAS 141R will be applied prospectively to business combinations for which the acquisition date is on or after January 1, 2009. Early adoption is not permitted.
While the impact on the Corporation will depend on the facts of a particular
business combination, SFAS 141R presents several significant changes from current accounting for business combinations, including accounting for contingent consideration, transaction costs, preacqusition contingencies, restructuring costs and
step-acquisitions. Upon adoption, contingent consideration arrangements would be recorded at fair value at the acquisition date. The concept of recognizing contingent consideration at a later date when the amount of that consideration is
determinable beyond a reasonable doubt will no longer be applicable. Transaction costs are not an element of fair value of the target, so they would be expensed as incurred. Preacquisition contingencies, such as legal issues, would generally be
recorded at fair value. However, if it is more likely than not that a non-contractual contingency will not materialize, nothing would be recorded at the acquisition date and, instead, that contingency will be subject to the recognition
criteria prescribed in FASB Statement No. 5,
Accounting for Contingencies
. Adjustments of valuation allowances related to acquired
80
Notes to Consolidated Financial Statements(Continued)
December 31, 2008, 2007, and 2006 ($000s except share data)
deferred tax assets and changes to acquired income tax uncertainties will be recognized in earnings, except for qualified measurement period adjustments. The
measurement period is a period of up to one year during which the initial amounts recognized for an acquisition can be adjusted. Restructuring costs that the acquirer expects but is not obligated to incur would be recognized separately from the
business combination instead of being recognized as if they were a liability assumed at the acquisition date. Upon initially obtaining control, an acquirer will recognize 100% of the fair values of acquired assets, including goodwill, and assumed
liabilities, with only limited exceptions, even if the acquirer has not acquired 100% of its target. As a consequence, the current step acquisition model will be eliminated.
2. Discontinued Operations
On November 1, 2007, old Marshall & Ilsley Corporation, the Accounting Predecessor to new Marshall & Ilsley Corporation (which is
referred to as M&I or the Corporation) and its wholly owned subsidiary, Metavante Corporation, the Accounting Predecessor to Metavante Technologies, Inc. (which is referred to as Metavante) became two separate
publicly traded companies in accordance with the plan the Corporation announced in early April 2007. The Corporation refers to this transaction as the Separation.
As a result of the Separation, the assets, liabilities and net income of Metavante were de-consolidated from the
Corporations historical consolidated financial statements and are reported as discontinued operations. For the year ended December 31, 2007, income from discontinued operations in the Consolidated Statements of Income also includes the
expenses attributable to the Separation transaction.
Notwithstanding the legal form of the transactions, new Marshall & Ilsley was considered the divesting entity and treated as the accounting successor to Marshall & Ilsley Corporation and Metavante was
considered the accounting spinnee for financial reporting purposes in accordance with Emerging Issues Task Force Issue No. 02-11,
Accounting for Reverse Spinoffs
.
The results of discontinued operations for the years ended December 31,
2007 and 2006 consisted of the following:
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2007
|
|
|
2006
|
Metavante Income Before Provision for Income Taxes
|
|
$
|
242,687
|
|
|
$
|
240,483
|
Separation Transaction Expenses and Other Related Costs
|
|
|
(29,833
|
)
|
|
|
|
Gain on Sale of Metavante
|
|
|
525,576
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Before Provision for Income Taxes
|
|
|
738,430
|
|
|
|
240,483
|
Provision for Income Taxes
|
|
|
84,433
|
|
|
|
80,359
|
|
|
|
|
|
|
|
|
Income from Discontinued Operations, Net of Tax
|
|
$
|
653,997
|
|
|
$
|
160,124
|
|
|
|
|
|
|
|
|
Metavantes
results of operations for the year ended December 31, 2007 included in the table above reflect results of operations for the ten months ended October 31, 2007. For periods beginning after November 1, 2007, M&I reported the
historical consolidated results of operations (subject to certain adjustments) of Metavante in discontinued operations in accordance with the provisions of Statement of Financial Accounting Standards No. 144 (SFAS 144),
Accounting for the Impairment or Disposal of Long-Lived Assets
.
81
Notes to Consolidated Financial Statements(Continued)
December 31, 2008, 2007, and 2006 ($000s except share data)
The transaction expenses of the Corporation related to the
Separation included in discontinued operations consisted of the following:
|
|
|
|
|
|
Year Ended
December 31,
2007
|
Investment Banking Fees
|
|
$
|
10,200
|
Stock Option Expense
|
|
|
11,969
|
Accounting, Legal & Tax Fees
|
|
|
5,002
|
Consulting Fees
|
|
|
1,036
|
Printing, Proxy & Regulatory Fees
|
|
|
1,008
|
Other
|
|
|
618
|
|
|
|
|
Total Transaction Expenses
|
|
$
|
29,833
|
|
|
|
|
WPM, L.P., a limited
partnership affiliated with Warburg Pincus Private Equity IX, L.P. (Warburg Pincus), and others consummated the transactions provided for in an investment agreement, a separation agreement and related transaction agreements pursuant to
which, Warburg Pincus invested $625 million in Metavante for an equity interest representing 25% of Metavante common stock. For accounting purposes only, the investment by Warburg Pincus in Metavante was treated as a sale of 25% of Metavantes
common stock by the Corporation to Warburg Pincus for cash in the amount of $625 million. The sale resulted in a tax-free gain of $525.6 million that is reported as a component of discontinued operations in the Consolidated Statements of Income for
the year ended December 31, 2007.
As permitted under U.S.
generally accepted accounting principles, the Corporation elected not to adjust the Consolidated Statements of Cash Flows for the periods presented to exclude cash flows attributable to discontinued operations.
Included in Cash Paid for Acquisitions, Net of Cash and Cash Equivalents
Acquired in the Corporations Consolidated Statements of Cash Flows for the years ended December 31, 2007 and 2006, are Metavantes acquisitions, which are part of discontinued operations. The total cash consideration associated with
Metavantes acquisitions amounted to $41.0 million in 2007 and $80.1 million in 2006. During 2006, Metavante received $29.9 million as a return of purchase price associated with a 2004 acquisition.
The net proceeds from the Separation included in the Consolidated Statements
of Cash Flows consisted of the following:
|
|
|
|
|
|
|
Year Ended
December 31,
2007
|
|
Cash Dividend from Metavante
|
|
$
|
1,040,000
|
|
Proceeds from Warburg Pincus
|
|
|
625,000
|
|
Metavantes Cash and Cash Equivalents maintained at Unaffiliated Entities
|
|
|
(46,388
|
)
|
Capital Contribution to Metavante
|
|
|
(17,500
|
)
|
Cash Paid for Transaction Costs
|
|
|
(8,466
|
)
|
|
|
|
|
|
Net Proceeds from the Separation
|
|
$
|
1,592,646
|
|
|
|
|
|
|
As part of the
Separation, the Corporation and Metavante entered into an agreement to share certain transaction costs and the cash paid to shareholders in lieu of fractional shares. In accordance with that agreement, the Corporation received $5,066 from Metavante.
On November 1, 2007, the Corporation received $982
million of cash from Metavante to retire its indebtedness.
82
Notes to Consolidated Financial Statements(Continued)
December 31, 2008, 2007, and 2006 ($000s except share data)
For accounting purposes only, after the sale to Warburg Pincus
of a 25% equity interest in Metavante, and after the dividend from Metavante, the Corporation distributed its remaining 75% ownership interest in Metavante to its shareholders on November 1, 2007. The Corporations investment in Metavante
at the time of the distribution was $298,272.
3. Fair Value Measurements
On January 1, 2008 the Corporation adopted, except
as discussed below, Statement of Financial Accounting Standard No. 157,
Fair Value Measurements
(SFAS 157). SFAS 157 provides enhanced guidance for using fair value to measure assets and liabilities. The standard
generally applies whenever other standards require or permit assets or liabilities to be measured at fair value. Under the standard, fair value refers to the price at the measurement date that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants in which the reporting entity is engaged. The standard does not expand the use of fair value in any new circumstances. As permitted, adoption of SFAS 157 has been delayed for certain
nonfinancial assets and nonfinancial liabilities to January 1, 2009.
All changes resulting from the application of SFAS 157 were applied prospectively with the effect of adoption recognized in either earnings or other comprehensive income depending on the applicable accounting
requirements for the particular asset or liability being measured.
In October 2008, the FASB issued FSP No. FAS 157-3 (FSP 157-3),
Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active
. FSP 157-3 clarifies, but does not change, the
application of existing principles in FASB Statement No. 157,
Fair Value Measurements
, in a market that is not active and provides an example to illustrate key considerations for determining the fair value of a financial asset
when either relevant observable inputs do not exist or available observable inputs are in a market that is not active. FSP 157-3 was effective for the Corporation on September 30, 2008 and the effect of adoption was not significant.
On February 14, 2008, the FASB issued FASB Staff Position No. FAS
157-1,
Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under FASB Statement 13
. This
FSP amended SFAS 157 to exclude accounting pronouncements, other than those related to business combinations, that address fair value measurements for purposes of lease classification or measurement.
On February 12, 2008, the FASB issued FASB Staff Position No. FAS 157-2,
Effective Date of FASB Statement No. 157
(FSP FAS 157-2). This FSP delayed the effective date of SFAS 157 for certain nonfinancial assets and nonfinancial liabilities to January 1, 2009. The effect of adoption was
not significant to the Corporations financial statements or related disclosures.
Fair-Value Hierarchy
SFAS 157 establishes a
three-tier hierarchy for fair value measurements based upon the transparency of the inputs to the valuation of an asset or liability and expands the disclosures about instruments measured at fair value. A financial instrument is categorized in its
entirety and its categorization within the hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The three levels are described below.
Level 1Inputs to the valuation methodology are quoted prices (unadjusted) for
identical
assets or liabilities
in active markets.
Level 2Inputs to the valuation
methodology include quoted prices for
similar
assets and liabilities in active markets and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. Fair
values for these instruments are estimated using pricing models, quoted prices of securities with similar characteristics, or discounted cash flows.
83
Notes to Consolidated Financial Statements(Continued)
December 31, 2008, 2007, and 2006 ($000s except share data)
Level 3Inputs to the valuation methodology are
unobservable and significant to the fair value measurement. Fair values are initially valued based upon transaction price and are adjusted to reflect exit values as evidenced by financing and sale transactions with third parties.
Determination of Fair Value
Following is a description of the valuation methodologies used for
instruments measured at fair value on a recurring basis, as well as the general classification of such instruments pursuant to the valuation hierarchy.
Trading Assets and Investment Securities
When available, the Corporation uses quoted market prices to determine the fair value of trading assets and investment securities; such items are
classified in Level 1 of the fair value hierarchy.
For the
Corporations investments in government agencies, mortgage-backed securities and obligations of states and political subdivisions where quoted prices are not available for identical securities in an active market, the Corporation determines
fair value utilizing vendors who apply matrix pricing for similar bonds where no price is observable or may compile prices from various sources. These models are primarily industry-standard models that consider various assumptions, including time
value, yield curve, volatility factors, prepayment speeds, default rates, loss severity, current market and contractual prices for the underlying financial instruments, as well as other relevant economic measures. Substantially all of these
assumptions are observable in the marketplace, can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace. Fair values from these models are verified, where possible, to quoted
prices for recent trading activity of assets with similar characteristics to the security being valued. Such methods are generally classified as Level 2. However, when prices from independent sources vary, cannot be obtained or cannot be
corroborated, a security is generally classified as Level 3.
For the Corporations Private Equity Group (formerly referred to as the Corporations Capital Markets Group), investments generally take the form of investments in private equity funds. The private equity investments are valued
using the valuations and financial statements provided by the general partners on a quarterly basis. The transaction price is used as the best estimate of fair value at inception. When evidence supports a change to the carrying value from the
transaction price, adjustments are made to reflect expected exit values. These nonpublic investments are included in Level 3 of the fair value hierarchy because they trade infrequently, and, therefore, the fair value is unobservable.
Estimated fair values for residual interests in the form of interest only
strips from automobile loan securitizations are based on a discounted cash flow analysis and are classified as a Level 3.
Derivative Financial Instruments
Fair values for exchange-traded contracts are based on quoted prices and are classified as Level 1. Fair values for over-the-counter interest rate
contracts are provided either by third-party dealers in the contracts or by quotes provided by the Corporations independent pricing services. The significant inputs, including the LIBOR curve and measures of volatility, used by these
third-party dealers or independent pricing services to determine fair values are considered Level 2, observable market inputs.
Certain derivative transactions are executed with counterparties who are large financial institutions (dealers). These derivative transactions
primarily consist of interest rate swaps that were used for fair value hedges, cash flow hedges and economic hedges of interest rate swaps executed with the Corporations customers. The Corporation and its subsidiaries maintain risk management
policies and procedures to monitor and limit exposure to credit risk to derivative transactions with dealers. Approved dealers for these transactions must have and maintain an investment grade rating on long-term senior debt from at least two
nationally recognized statistical rating organizations or have a guarantor with an acceptable rating from such organizations. International Swaps and Derivative Association Master
84
Notes to Consolidated Financial Statements(Continued)
December 31, 2008, 2007, and 2006 ($000s except share data)
Agreements (ISDA) and Credit Support Annexes (CSA) are employed for all contracts with dealers. These agreements contain bilateral
collateral arrangements. Notwithstanding its policies and procedures, the Corporation recognizes that unprecedented events could result in counterparty failure. The Corporation also recognizes that there could be additional credit exposure due to
certain industry conventions established for operational efficiencies.
On a quarterly basis, the Corporation performs an analysis using historical and market implied default and recovery rates that also consider certain industry conventions established for operational efficiencies to estimate the potential
impact on the reported fair values of these derivative financial assets and liabilities due to counterparty credit risk and the Corporations own credit risk. Based on this analysis, the Corporation determined that the impact of these factors
was insignificant and did not make any additional credit risk adjustments for purposes of determining the reported fair values of these derivative assets and liabilities with dealers at December 31, 2008.
Certain derivative transactions are executed with customers whose
counterparty credit risk is similar in nature to the credit risk associated with the Corporations lending activities. As is the case with a loan, the Corporation evaluates the credit risk of each of these customers on an individual basis and,
where deemed appropriate collateral is obtained. The type of collateral varies and is often the same collateral as the collateral obtained to secure a customers loan. For purposes of assessing the potential impact of counterparty credit risk
on the fair values of derivative assets with customers, the Corporation used a probability analysis to estimate the amount of expected loss exposure due to customer default at some point in the remaining term of the entire portfolio of customer
derivative contracts outstanding at December 31, 2008. While not significant, the Corporation did factor in the estimated amount of expected loss due to customer default into the reported fair value of its customer derivative assets at
December 31, 2008.
Assets and liabilities measured at
fair value on a recurring basis are categorized in the tables below based upon the lowest level of significant input to the valuations as of December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level
3)
|
Assets
(1)
|
|
|
|
|
|
|
|
|
|
|
Trading Assets:
|
|
|
|
|
|
|
|
|
|
|
Trading Securities
|
|
$
|
|
|
|
$
|
186,792
|
|
$
|
|
Derivative Assets
|
|
|
112
|
|
|
|
331,457
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Trading Assets
|
|
$
|
112
|
|
|
$
|
518,249
|
|
$
|
|
Investment Securities Available for Sale (2):
|
|
|
|
|
|
|
|
|
|
|
Investment Securities
|
|
$
|
127
|
|
|
$
|
6,840,021
|
|
$
|
135,953
|
Private Equity Investments
|
|
|
|
|
|
|
|
|
|
65,288
|
Other
|
|
|
|
|
|
|
|
|
|
5,903
|
|
|
|
|
|
|
|
|
|
|
|
Total Investment Securities Available for Sale
|
|
$
|
127
|
|
|
$
|
6,840,021
|
|
$
|
207,144
|
|
|
|
|
Liabilities
(1)
|
|
|
|
|
|
|
|
|
|
|
Other Short-term Borrowings
|
|
$
|
|
|
|
$
|
23,478
|
|
$
|
|
Accrued Expenses and Other Liabilities:
|
|
|
|
|
|
|
|
|
|
|
Derivative Liabilities
|
|
$
|
(84
|
)
|
|
$
|
286,846
|
|
$
|
|
(1)
|
|
The amounts presented above exclude certain over-the-counter interest rate swaps that are the designated hedging instruments in fair value and cash flow hedges that are used by the
Corporation to manage its interest rate risk. These interest rate swaps are measured at fair value on a recurring basis based on significant other observable inputs and are categorized as Level 2. See Note 21 Derivative Financial Instruments
and Hedging Activities in Notes to Consolidated Financial Statements for further information.
|
(2)
|
|
The amounts presented above are exclusive of $339,779 of investments in Federal Reserve Bank and FHLB stock, which are bought and sold at par and are carried at cost and $43,481 in
affordable housing partnerships, which are generally carried on the equity method.
|
85
Notes to Consolidated Financial Statements(Continued)
December 31, 2008, 2007, and 2006 ($000s except share data)
Level 3 Gains and Losses
The table presented below summarizes the change in balance sheet carrying
values associated with financial instruments measured using significant unobservable inputs (Level 3) during the twelve months ended December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
securities (1)
|
|
|
Private equity
investments (2)
|
|
|
Other
|
|
|
Total
|
|
Balance at January 1, 2008
|
|
$
|
2,066
|
|
|
$
|
54,121
|
|
|
$
|
9,030
|
|
|
$
|
65,217
|
|
Net payments, purchases and sales
|
|
|
23,569
|
|
|
|
18,200
|
|
|
|
(3,307
|
)
|
|
|
38,462
|
|
Discount accretion
|
|
|
141
|
|
|
|
|
|
|
|
740
|
|
|
|
881
|
|
Net transfers in and/or out of Level 3
|
|
|
185,698
|
|
|
|
|
|
|
|
|
|
|
|
185,698
|
|
Total gains or losses (realized or unrealized):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in earnings
|
|
|
|
|
|
|
(7,033
|
)
|
|
|
(1,743
|
)
|
|
|
(8,776
|
)
|
Included in other comprehensive income
|
|
|
(75,521
|
)
|
|
|
|
|
|
|
1,183
|
|
|
|
(74,338
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008
|
|
$
|
135,953
|
|
|
$
|
65,288
|
|
|
$
|
5,903
|
|
|
$
|
207,144
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains or losses for the year included in earnings attributable to unrealized gains or losses for assets still held at
December 31, 2008
|
|
$
|
|
|
|
$
|
(9,795
|
)
|
|
$
|
(1,972
|
)
|
|
$
|
(11,767
|
)
|
(1)
|
|
Unrealized changes in fair value for available-for-sale investments (debt securities) are recorded in other comprehensive income, while gains and losses from sales are recorded in
Net Investment Securities Gains in the Consolidated Statements of Income.
|
(2)
|
|
Private equity investments are generally recorded at fair value. Accordingly, both unrealized changes in fair value and gains or losses from sales are included in Net Investment
Securities Gains in the Consolidated Statements of Income.
|
The increase in Level 3 investment securities at December 31, 2008 was primarily due to the transfer of certain highly-rated asset backed securities. During the year ended December 31, 2008, the Corporation
determined that it could not obtain a sufficient number of observable inputs in the form of market or broker quotes to substantiate a Level 2 classification.
Loans held for sale are recorded at LOCOM and therefore are reported at fair value on a nonrecurring basis. Such fair values are generally based on bids
and are considered Level 2 fair values. For nonaccrual loans greater than an established threshold individually evaluated for impairment and all renegotiated loans, impairment is measured based on the fair value of the collateral less estimated
selling costs or the fair value to the loan, collectively the collateral value method, or the present value of the estimated cash flows discounted at the loans original effective interest rate, the discounted cash flow method. A valuation
allowance is recorded for the excess of the loans recorded investment over the amount determined by either the collateral value method or the discounted cash flow method. This valuation allowance is a component of the Allowance for loan and
lease losses. The discounted cash flow method is not a fair value measure. For the collateral value method, the Corporation generally obtains appraisals to support the fair value of collateral underlying loans. Appraisals incorporate measures such
as recent sales prices for comparable properties and costs of construction. The Corporation considers these fair values Level 3. For those loans individually evaluated for impairment using the collateral value method, a valuation allowance of
$68,837 was recorded for loans with a recorded investment of $737,700 at December 31, 2008. See Note 8Allowance for Loan and Lease Losses in Notes to Consolidated Financial Statements for more information.
On January 1, 2008, the Corporation adopted Statement of Financial
Accounting Standard No. 159,
The Fair Value Option for Financial Assets and Financial Liabilities, Including an Amendment of FASB Statement No. 115
(SFAS 159). SFAS 159 permits entities to choose to measure many
financial instruments and certain other items generally on an instrument-by-instrument basis at fair value that are not currently required to be measured at fair value. SFAS 159 is intended to provide entities with the opportunity to mitigate
volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. SFAS 159 does not change requirements for recognizing and measuring dividend income, interest
income, or interest
86
Notes to Consolidated Financial Statements(Continued)
December 31, 2008, 2007, and 2006 ($000s except share data)
expense. The Corporation did not elect to measure any existing financial instruments at fair value at January 1, 2008. However, the Corporation may
elect to measure newly acquired financial instruments at fair value in the future.
4. Earnings Per Common Share
The following
presents a reconciliation of the numerators and denominators of the basic and diluted per common share computations (dollars and shares in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2008
|
|
|
|
Income
(Numerator)
|
|
|
Average Shares
(Denominator)
|
|
Per Share
Amount
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
$
|
(2,043,462
|
)
|
|
|
|
|
|
|
Preferred dividends
|
|
|
(12,737
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss available to common shareholders
|
|
$
|
(2,056,199
|
)
|
|
259,615
|
|
$
|
(7.92
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
Stock option, restricted stock and other plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
$
|
(2,043,462
|
)
|
|
|
|
|
|
|
Preferred dividends
|
|
|
(12,737
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss available to common shareholders
|
|
$
|
(2,056,199
|
)
|
|
259,615
|
|
$
|
(7.92
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2007
|
|
|
|
Income
(Numerator)
|
|
|
Average Shares
(Denominator)
|
|
Per Share
Amount
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
496,939
|
|
|
|
|
$
|
1.91
|
|
Income from discontinued operations
|
|
|
653,997
|
|
|
|
|
|
2.51
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common shareholders
|
|
$
|
1,150,936
|
|
|
260,268
|
|
$
|
4.42
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
Stock option, restricted stock and other plans
|
|
|
|
|
|
5,212
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
496,939
|
|
|
|
|
$
|
1.87
|
|
Income from discontinued operations
|
|
|
653,997
|
|
|
|
|
|
2.47
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common shareholders
|
|
$
|
1,150,936
|
|
|
265,480
|
|
$
|
4.34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2006
|
|
|
|
Income
(Numerator)
|
|
|
Average Shares
(Denominator)
|
|
Per Share
Amount
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
647,714
|
|
|
|
|
$
|
2.60
|
|
Income from discontinued operations
|
|
|
160,124
|
|
|
|
|
|
0.64
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common shareholders
|
|
$
|
807,838
|
|
|
249,163
|
|
$
|
3.24
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
Stock option, restricted stock and other plans
|
|
|
|
|
|
5,421
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
647,714
|
|
|
|
|
$
|
2.54
|
|
Income from discontinued operations
|
|
|
160,124
|
|
|
|
|
|
0.63
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common shareholders
|
|
$
|
807,838
|
|
|
254,584
|
|
$
|
3.17
|
|
|
|
|
|
|
|
|
|
|
|
|
87
Notes to Consolidated Financial Statements(Continued)
December 31, 2008, 2007, and 2006 ($000s except share data)
The table below presents the options to purchase shares of
common stock not included in the computation of diluted earnings per common share because the stock options exercise price was greater than the average market price of the common shares for the periods ended 2008, 2007 and 2006 (anti-dilutive
options). As a result of the Corporations reported net loss for the year ended December 31, 2008, all of the stock options outstanding were excluded from the computation of diluted earnings per common share. (shares in thousands)
|
|
|
|
|
|
Year Ended December 31,
|
|
Price Range
|
|
Shares
|
2008
|
|
$
|
8.55$36.82
|
|
33,439
|
2007
|
|
|
28.71 36.82
|
|
5,709
|
2006
|
|
|
45.71 48.54
|
|
3,725
|
5. Business Combinations
The following acquisitions, which are not considered to
be material business combinations individually or in the aggregate, were completed during 2008:
On December 3, 2008, the Corporation completed its acquisition of an 80% equity interest in Taplin, Canida & Habacht, Inc.
(TCH). TCH, based in Miami, Florida, is an institutional fixed income money manager with approximately $7.3 billion of assets under management as of December 31, 2008. Total consideration in this transaction amounted to $64.0
million, consisting of 4,863,221 shares of the Corporations common stock valued at $13.16 per common share. This is considered a non-cash transaction for the purposes of the Consolidated Statement of Cash Flows. TCH was integrated with the
Corporations Wealth Management segment. Initial goodwill, subject to the completion of appraisals and valuation of the assets acquired and liabilities assumed, amounted to $39.2 million. The estimated identifiable intangible asset to be
amortized, subject to a completed valuation, amounted to $24.9 million. The goodwill and intangibles resulting from this acquisition are deductible for tax purposes. The Corporation will acquire the remaining 20% interest in TCH over the next five
years through subsequent payments based on certain criteria, which include the future earnings of TCH, as defined in the TCH Purchase Agreement, and therefore cannot be determined at the present time.
On January 2, 2008, the Corporation completed its acquisition of First
Indiana Corporation (First Indiana) based in Indianapolis, Indiana. First Indiana, with $2.1 billion in consolidated assets as of December 31, 2007, had 32 branches in central Indiana which became branches of M&I Bank on
February 2, 2008. Stockholders of First Indiana received $32.00 in cash for each share of First Indiana common stock outstanding, or approximately $530.2 million. Goodwill amounted to $412.7 million. The estimated identifiable intangible asset
to be amortized (core deposits) with a weighted average life of 5.7 years amounted to $33.6 million. The goodwill and intangibles resulting from this acquisition are not deductible for tax purposes.
The following acquisitions, which are not considered to be material business
combinations individually or in the aggregate, were completed during 2007:
On July 1, 2007, the Corporation completed its acquisition of Excel Bank Corporation (Excel). Pursuant to an Amended and Restated Merger Agreement, shareholders of Excel received $13.97 per share in
cash for each issued and outstanding share of Excel common stock. Total consideration in this transaction amounted to approximately $105.0 million in the aggregate, consisting of $101.2 million in cash and the exchange of vested stock options valued
at approximately $3.8 million. Outstanding vested options to acquire Excel common stock were exchanged for options to acquire the Corporations common stock. Excel, with $616.0 million in consolidated assets as of June 30, 2007, had four
branches in the greater Minneapolis/St. Paul, Minnesota metropolitan area which became branches of M&I Bank on August 1, 2007. Goodwill amounted to $80.3 million. The estimated identifiable intangible asset to be amortized (core
deposits) with a weighted average life of 6.2 years amounted to $4.2 million. The goodwill and intangibles resulting from this acquisition are deductible for tax purposes.
88
Notes to Consolidated Financial Statements(Continued)
December 31, 2008, 2007, and 2006 ($000s except share data)
On April 20, 2007, the Corporation completed its
acquisition of North Star Financial Corporation (North Star) of Chicago, Illinois. Total consideration in this transaction amounted to $21.0 million, consisting of 441,252 shares of the Corporations 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 Stars businesses were integrated with the Corporations Wealth Management segment.
Goodwill amounted to $16.7 million. The estimated identifiable intangible assets to be amortized (customer relationships, tradename and non-compete agreements) with a weighted average life of 7.0 years amounted to $10.2 million. This is considered a
non-cash transaction for the purposes of the Consolidated Statement of Cash Flows. The goodwill and intangibles resulting from this acquisition are not deductible for tax purposes.
On April 1, 2007, the Corporation completed its acquisition of United Heritage Bankshares of Florida, Inc.
(United Heritage). United Heritage Bank, a wholly-owned subsidiary of United Heritage, with $791.3 million in assets as of March 31, 2007, had 13 branches in the metropolitan Orlando area which became M&I Bank branches in the
second quarter of 2007. Total consideration in this transaction amounted to approximately $219.6 million, consisting of 4,410,647 shares of the Corporations common stock valued at $204.3 million and the exchange of vested stock options valued
at approximately $15.3 million. Goodwill amounted to $147.8 million. The estimated identifiable intangible asset to be amortized (core deposits) with a weighted average life of 7.7 years amounted to $11.6 million. This is considered a non-cash
transaction for the purposes of the Consolidated Statement of Cash Flows. The goodwill and intangibles resulting from this acquisition are not deductible for tax purposes.
The following acquisitions, which are not considered to be material business combinations individually or in the aggregate, were completed
during 2006:
On April 1, 2006, the Corporation completed
the acquisition of Gold Banc Corporation, Inc. (Gold Banc), a bank holding company headquartered in Leawood, Kansas, which offers commercial banking, retail banking, trust and asset management products and services through various
subsidiaries. Gold Banc had consolidated assets of $4.2 billion at the time of the merger. Total consideration in this transaction, including the effect of terminating Gold Bancs employee stock ownership plan, amounted to $716.2 million,
consisting of 13,672,665 shares of M&I common stock valued at $601.0 million, the exchange of 119,816 vested options valued at $2.9 million and total cash consideration of $112.3 million. Gold Bancs largest subsidiary, Gold Bank, a Kansas
state-chartered bank, was merged with and into M&I Bank on April 1, 2006 at which time, the 32 Gold Bank branch offices in Florida, Kansas, Missouri and Oklahoma became interstate branch offices of M&I Bank. Goodwill amounted to $493.5
million. Approximately $485.6 million of the goodwill was assigned to Banking and the remainder was assigned to the Corporations Trust reporting unit of the Wealth Management segment.
The estimated identifiable intangible asset to be
amortized (core deposits) with an estimated weighted average life of 5.0 years amounted to $44.1 million. The goodwill and intangibles resulting from this transaction are not deductible for tax purposes.
On April 1, 2006, the Corporation completed the acquisition of St.
Louis-based Trustcorp Financial, Inc. (Trustcorp). With the acquisition of Trustcorp, which had consolidated assets of $735.7 million at the time of the merger, the Corporation acquired Missouri State Bank and Trust Company, which
provides commercial banking services in Missouri through seven bank locations. In July 2006, the Missouri State Bank and all of its branches were merged with and into Southwest Bank, the Corporations St. Louis-based banking affiliate. Total
consideration in this transaction amounted to $182.0 million, consisting of 3,069,328 shares of M&I common stock valued at $134.9 million, the exchange of 412,317 vested options valued at $13.4 million and cash consideration of $33.7 million.
Goodwill amounted to $130.4 million. The estimated identifiable intangible asset to be amortized (core deposits) with an estimated weighted average life of 7.5 years amounted to $10.9 million. The goodwill and intangibles resulting from this
transaction are partially deductible for tax purposes.
On
January 3, 2006, M&I Trust completed the acquisition of the trust and asset management business assets of FirstTrust Indiana of Indianapolis, Indiana, a division of First Indiana Bank, N.A. (FirstTrust Indiana). The total cash
89
Notes to Consolidated Financial Statements(Continued)
December 31, 2008, 2007, and 2006 ($000s except share data)
consideration was $15.9 million. FirstTrust Indiana offers asset management, trust administration and estate planning services to high net-worth individuals
and institutional customers. Goodwill amounted to $13.4 million. The estimated identifiable intangible asset to be amortized (trust customers) with an estimated weighted average life of 5.9 years amounted to $2.0 million. The goodwill and
intangibles resulting from this transaction are deductible for tax purposes.
The results of operations of the acquired entities have been included in the consolidated results since the dates the transactions were closed.
6. Investment Securities
The amortized cost and fair value of selected securities at December 31 were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
2007
|
|
|
Amortized
Cost
|
|
Fair
Value
|
|
Amortized
Cost
|
|
Fair
Value
|
Investment Securities Available for Sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and government agencies
|
|
$
|
5,664,947
|
|
$
|
5,679,970
|
|
$
|
5,849,041
|
|
$
|
5,824,303
|
States and political subdivisions
|
|
|
874,183
|
|
|
880,497
|
|
|
894,015
|
|
|
904,230
|
Mortgage backed securities
|
|
|
175,740
|
|
|
165,757
|
|
|
119,487
|
|
|
118,477
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
803,063
|
|
|
704,207
|
|
|
596,314
|
|
|
595,879
|
Cash flow hedgeCorporate Notes
|
|
|
121
|
|
|
121
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
803,184
|
|
|
704,328
|
|
|
596,314
|
|
|
595,879
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
7,518,054
|
|
$
|
7,430,552
|
|
$
|
7,458,857
|
|
$
|
7,442,889
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment Securities Held to Maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
States and political subdivisions
|
|
$
|
237,009
|
|
$
|
242,395
|
|
$
|
373,861
|
|
$
|
382,190
|
Other
|
|
|
1,000
|
|
|
1,000
|
|
|
1,000
|
|
|
1,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
238,009
|
|
$
|
243,395
|
|
$
|
374,861
|
|
$
|
383,190
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the second
quarter of 2008, $1.6 million of investment securities in the Corporations held to maturity portfolio were downgraded. As a result, the Corporation sold these securities, as permitted under Statement of Financial Accounting Standards
No. 115,
Accounting for Certain Investments in Debt and Equity Securities
. The gains associated with this sale were immaterial.
The unrealized gains and losses of selected securities at December 31 were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
2007
|
|
|
Unrealized
Gains
|
|
Unrealized
Losses
|
|
Unrealized
Gains
|
|
Unrealized
Losses
|
Investment Securities Available for Sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and government agencies
|
|
$
|
93,541
|
|
$
|
78,518
|
|
$
|
17,188
|
|
$
|
41,926
|
States and political subdivisions
|
|
|
19,387
|
|
|
13,073
|
|
|
15,201
|
|
|
4,986
|
Mortgage backed securities
|
|
|
214
|
|
|
10,197
|
|
|
323
|
|
|
1,333
|
Other
|
|
|
1,966
|
|
|
100,822
|
|
|
741
|
|
|
1,176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
115,108
|
|
$
|
202,610
|
|
$
|
33,453
|
|
$
|
49,421
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment Securities Held to Maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
States and political subdivisions
|
|
$
|
5,562
|
|
$
|
176
|
|
$
|
8,375
|
|
$
|
46
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
5,562
|
|
$
|
176
|
|
$
|
8,375
|
|
$
|
46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
90
Notes to Consolidated Financial Statements(Continued)
December 31, 2008, 2007, and 2006 ($000s except share data)
The amortized cost and fair value of selected securities by
contractual maturity at December 31, 2008 were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment Securities
Available for Sale
|
|
Investment Securities
Held to Maturity
|
|
|
Amortized
Cost
|
|
Fair
Value
|
|
Amortized
Cost
|
|
Fair
Value
|
Within one year
|
|
$
|
344,585
|
|
$
|
340,790
|
|
$
|
62,195
|
|
$
|
63,121
|
From one through five years
|
|
|
5,605,323
|
|
|
5,622,839
|
|
|
59,283
|
|
|
61,192
|
From five through ten years
|
|
|
525,137
|
|
|
527,200
|
|
|
101,231
|
|
|
103,593
|
After ten years
|
|
|
1,043,009
|
|
|
939,723
|
|
|
15,300
|
|
|
15,489
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
7,518,054
|
|
$
|
7,430,552
|
|
$
|
238,009
|
|
$
|
243,395
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 Months
|
|
12 Months or More
|
|
Total
|
|
|
Fair Value
|
|
Unrealized
Losses
|
|
Fair Value
|
|
Unrealized
Losses
|
|
Fair Value
|
|
Unrealized
Losses
|
U.S. Treasury and government agencies
|
|
$
|
875,294
|
|
$
|
27,597
|
|
$
|
1,019,911
|
|
$
|
50,921
|
|
$
|
1,895,205
|
|
$
|
78,518
|
States and political subdivisions
|
|
|
126,329
|
|
|
4,619
|
|
|
130,134
|
|
|
8,630
|
|
|
256,463
|
|
|
13,249
|
Mortgage backed securities
|
|
|
65,971
|
|
|
4,287
|
|
|
62,397
|
|
|
5,910
|
|
|
128,368
|
|
|
10,197
|
Other
|
|
|
87,869
|
|
|
18,498
|
|
|
59,966
|
|
|
82,324
|
|
|
147,835
|
|
|
100,822
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,155,463
|
|
$
|
55,001
|
|
$
|
1,272,408
|
|
$
|
147,785
|
|
$
|
2,427,871
|
|
$
|
202,786
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The investment
securities in the above table were temporarily impaired at December 31, 2008. This temporary impairment represents the amount of loss that would have been realized if the investment securities had been sold on December 31, 2008. The
temporary impairment in the investment securities portfolio is the result of increases in market interest rates since the investment securities were acquired and not from deterioration in the creditworthiness of the issuer. At December 31,
2008, the Corporation had the ability and intent to hold these temporarily impaired investment securities until a recovery of fair value, which may be maturity.
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 December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 Months
|
|
12 Months or More
|
|
Total
|
|
|
Fair Value
|
|
Unrealized
Losses
|
|
Fair Value
|
|
Unrealized
Losses
|
|
Fair Value
|
|
Unrealized
Losses
|
U.S. Treasury and government agencies
|
|
$
|
1,192,332
|
|
$
|
5,563
|
|
$
|
2,378,349
|
|
$
|
36,363
|
|
$
|
3,570,681
|
|
$
|
41,926
|
States and political subdivisions
|
|
|
205,834
|
|
|
3,642
|
|
|
97,628
|
|
|
1,390
|
|
|
303,462
|
|
|
5,032
|
Mortgage backed securities
|
|
|
18,730
|
|
|
224
|
|
|
61,345
|
|
|
1,109
|
|
|
80,075
|
|
|
1,333
|
Other
|
|
|
142,096
|
|
|
1,112
|
|
|
400
|
|
|
64
|
|
|
142,496
|
|
|
1,176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,558,992
|
|
$
|
10,541
|
|
$
|
2,537,722
|
|
$
|
38,926
|
|
$
|
4,096,714
|
|
$
|
49,467
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The gross investment
securities gains and losses, including Wealth Management transactions, amounted to $32,023 and $14,697 in 2008, $46,378 and $11,560 in 2007, and $15,810 and $6,205 in 2006, respectively. See the Consolidated Statements of Cash Flows for the proceeds
from the sale of investment securities.
Income tax expense
related to net securities transactions amounted to $6,164, $12,198, and $3,428 in 2008, 2007, and 2006, respectively.
At December 31, 2008, securities with a value of approximately $2,226,773 were pledged to secure public deposits, short-term borrowings, and for
other purposes required by law.
91
Notes to Consolidated Financial Statements(Continued)
December 31, 2008, 2007, and 2006 ($000s except share data)
7. Loans and Leases
Loans and leases, including loans held for sale at December 31 were:
|
|
|
|
|
|
|
|
|
|
2008
|
|
2007
|
|
Commercial, financial and agricultural
|
|
$
|
14,880,153
|
|
$
|
13,793,951
|
|
Cash flow hedgevariable rate loans
|
|
|
|
|
|
(694
|
)
|
|
|
|
|
|
|
|
|
Commercial, financial and agricultural
|
|
|
14,880,153
|
|
|
13,793,257
|
|
Real estate:
|
|
|
|
|
|
|
|
Construction
|
|
|
6,091,501
|
|
|
6,691,716
|
|
Residential mortgage
|
|
|
7,855,888
|
|
|
7,105,201
|
|
Home equity loans and lines of credit
|
|
|
5,082,046
|
|
|
4,413,205
|
|
Commercial mortgage
|
|
|
13,371,288
|
|
|
12,002,162
|
|
|
|
|
|
|
|
|
|
Total Real Estate
|
|
|
32,400,723
|
|
|
30,212,284
|
|
Personal
|
|
|
1,929,374
|
|
|
1,560,573
|
|
Lease financing
|
|
|
774,294
|
|
|
730,144
|
|
|
|
|
|
|
|
|
|
Total Loans and Leases
|
|
$
|
49,984,544
|
|
$
|
46,296,258
|
|
|
|
|
|
|
|
|
|
Loans are presented
net of unearned income and unamortized deferred fees, which amounted to $149,894 and $159,623 in 2008 and 2007, respectively.
Included in the real estate loans category are residential mortgage loans held for sale which amounted to $40,248 and $40,253 at December 31, 2008
and 2007, respectively. Student loans held for sale, which are included in the personal loans category, were $107,542 and $91,620 at December 31, 2008 and 2007, respectively. At December 31, 2008, the Corporation also had $72,601 of loans
held for sale, of which $69,139 were on nonaccrual status.
Commercial loans and commercial mortgages are evaluated for the adequacy of repayment sources at the time of approval and are regularly reviewed for any possible deterioration in the ability of the borrower to repay the loan.
The Corporation evaluates the credit risk of each commercial customer on an
individual basis and, where deemed appropriate, collateral is obtained. Collateral varies by the type of loan and individual loan customer and may include accounts receivable, inventory, real estate, equipment, deposits, personal and government
guarantees, and general security agreements. The Corporations access to collateral is dependent upon the type of collateral obtained.
Policies have been established that set standards for the maximum commercial mortgage loan amount by type of property, loan terms, pricing structures,
loan-to-value limits by property type, minimum requirements for initial investment and maintenance of equity by the borrower, borrower net worth, property cash flow and debt service coverage as well as policies and procedures for granting exceptions
to established underwriting standards.
The Corporations
residential real estate lending policies require all loans to have viable repayment sources. Residential real estate loans are evaluated for the adequacy of these repayment sources at the time of approval, using such factors as credit scores,
debt-to-income ratios and collateral values. Home equity loans and lines of credit are generally governed by the same lending policies.
Origination activities for commercial construction loans and residential construction loans are similar to those described above for commercial mortgages
and residential real estate lending.
92
Notes to Consolidated Financial Statements(Continued)
December 31, 2008, 2007, and 2006 ($000s except share data)
The Corporations lending activities are concentrated
primarily in the Midwest. The Corporations loan portfolio consists of business loans extending across many industry types, as well as loans to individuals. As of December 31, 2008, total loans to any group of customers engaged in similar
activities and having similar economic characteristics, as defined by the North American Industry Classification System, did not exceed 10% of total loans. The following table presents a geographical summary of loans and leases as a percent of total
consolidated loans and leases at December 31:
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
Wisconsin
|
|
36.1
|
%
|
|
37.5
|
%
|
Arizona
|
|
15.0
|
|
|
16.7
|
|
Minnesota
|
|
10.4
|
|
|
10.7
|
|
Missouri
|
|
7.0
|
|
|
6.8
|
|
Florida
|
|
6.2
|
|
|
6.2
|
|
Kansas & Oklahoma
|
|
2.6
|
|
|
2.8
|
|
Indiana
|
|
3.2
|
|
|
0.7
|
|
Others
|
|
19.5
|
|
|
18.6
|
|
|
|
|
|
|
|
|
Total
|
|
100.0
|
%
|
|
100.0
|
%
|
|
|
|
|
|
|
|
The Corporation offers
a variety of loan products with payment terms and rate structures that have been designed to meet the needs of its customers within an established framework of acceptable credit risk. Payment terms range from fully amortizing loans that require
periodic principal and interest payments to terms that require periodic payments of interest-only with principal due at maturity. Interest-only loans are typical in commercial and business line-of-credit or revolving line-of-credit loans, home
equity lines-of-credit and construction loans (residential and commercial). At December 31, 2008, the Corporation did not have loans with below market or so-called teaser interest rates. At December 31, 2008, the Corporation did not offer,
hold or service 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 periodically reviews the residual values associated with
its leasing portfolios. Declines in residual values that are judged to be other than temporary are recognized as a loss resulting in a reduction in the net investment in the lease. Residual impairment losses of $4,961 were incurred for the year
ended December 31, 2008. There were no residual impairment losses for the year ended December 31, 2007.
An analysis of loans outstanding to directors and officers, including their related interests, by the Corporation and its significant subsidiaries for
2008 is presented in the following table. All of these loans were made in the ordinary course of business with normal credit terms, including interest rates and collateral. The beginning balance has been adjusted to reflect the activity of
newly-elected directors and newly-appointed executive officers, and directors and executive officers from the prior year that are no longer affiliated with the Corporation.
|
|
|
|
|
Loans to directors and executive officers:
|
|
|
|
|
Balance, beginning of year
|
|
$
|
160,245
|
|
New loans
|
|
|
407,918
|
|
Repayments
|
|
|
(360,350
|
)
|
|
|
|
|
|
Balance, end of year
|
|
$
|
207,813
|
|
|
|
|
|
|
93
Notes to Consolidated Financial Statements(Continued)
December 31, 2008, 2007, and 2006 ($000s except share data)
8. Allowance for Loan and Lease Losses
An analysis of the allowance for loan and lease losses follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Balance, beginning of year
|
|
$
|
496,191
|
|
|
$
|
420,610
|
|
|
$
|
363,769
|
|
Allowance of loans and leases acquired
|
|
|
32,110
|
|
|
|
11,713
|
|
|
|
45,258
|
|
Provision charged to expense
|
|
|
2,037,707
|
|
|
|
319,760
|
|
|
|
50,551
|
|
Charge-offs
|
|
|
(1,394,429
|
)
|
|
|
(271,345
|
)
|
|
|
(55,430
|
)
|
Recoveries
|
|
|
30,588
|
|
|
|
15,453
|
|
|
|
16,462
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
$
|
1,202,167
|
|
|
$
|
496,191
|
|
|
$
|
420,610
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
December 31, 2008 and 2007, nonaccrual loans and leases totaled $1,526,950 and $686,888, and renegotiated loans totaled $270,357 and $224,398, respectively.
For purposes of impairment testing, loans greater than an established threshold were individually evaluated for impairment.
Loans below those scopes were collectively evaluated as homogeneous pools. Renegotiated loans are evaluated at the present value of expected future cash flows discounted at the loans effective interest rate. The required valuation allowance is
included in the allowance for loan and lease losses in the Consolidated Balance Sheets. At December 31, 2008 and 2007, the Corporations recorded investment in impaired loans and leases and the related valuation allowance are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
2007
|
|
|
Recorded
Investment
|
|
|
Valuation
Allowance
|
|
Recorded
Investment
|
|
|
Valuation
Allowance
|
Total nonaccrual and renegotiated loans and leases
|
|
$
|
1,797,307
|
|
|
|
|
|
$
|
911,286
|
|
|
|
|
Less: nonaccrual loans held for sale
|
|
|
(69,139
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total impaired loans and leases
|
|
$
|
1,728,168
|
|
|
|
|
|
$
|
911,286
|
|
|
|
|
Loans and leases excluded from individual evaluation
|
|
|
(803,646
|
)
|
|
|
|
|
|
(251,789
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans evaluated
|
|
$
|
924,522
|
|
|
|
|
|
$
|
659,497
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation allowance required
|
|
$
|
513,822
|
|
|
$
|
99,634
|
|
$
|
45,823
|
|
|
$
|
15,148
|
No valuation allowance required
|
|
|
410,700
|
|
|
|
|
|
|
613,674
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans evaluated
|
|
$
|
924,522
|
|
|
$
|
99,634
|
|
$
|
659,497
|
|
|
$
|
15,148
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The recorded
investment in impaired loans is net of applications of cash interest payments and net of previous direct write-downs of $534,578 in 2008 and $211,874 in 2007 against the loan balances outstanding.
The average recorded investment in total impaired loans and leases for the
years ended December 31, 2008 and 2007 amounted to $1,202,049 and $453,009, respectively.
Interest payments received on nonaccrual loans are recorded as interest income unless collection of the remaining recorded investment is doubtful at which time payments received are recorded as reductions of
principal. Interest on renegotiated loans is recognized on an accrual basis at the renegotiated rate if the loan is in compliance with the modified terms. Interest income recognized on total impaired loans and leases amounted to $108,259 in 2008,
$42,806 in 2007 and $14,099 in 2006. The gross income that would have been recognized had such loans and leases been performing in accordance with their original terms would have been $165,841 in 2008, $75,164 in 2007 and $26,970 in 2006.
94
Notes to Consolidated Financial Statements(Continued)
December 31, 2008, 2007, and 2006 ($000s except share data)
9. Financial Asset Sales and Variable Interest Entities
The Corporation sold indirect automobile loans to an unconsolidated
multi-seller asset-backed commercial paper conduit or basic term facilities, in securitization transactions in accordance with SFAS 140. During 2007, the Corporation opted to discontinue, on a recurring basis, the sale and securitization of
automobile loans into the secondary market. Automobile loans previously classified as held for sale were reclassified as portfolio loans at the lower of cost or market. The difference between cost and market was insignificant. For the remaining
multi-seller asset-backed commercial paper conduit and basic term facility, servicing responsibilities and subordinated interests are retained. The Corporation receives annual servicing fees based on the loan balances outstanding and rights to
future cash flows arising after investors in the securitization trusts have received their contractual return and after certain administrative costs of operating the trusts. The investors and the securitization trusts have no recourse to the
Corporations other assets for failure of debtors to pay when due. The Corporations retained interests are subordinate to investors interests. Their value is subject to credit, prepayment and interest rate risks on the transferred
financial assets.
During 2008, 2007 and 2006, the Corporation
recognized net gain (losses) of ($354), $1,155 and ($119), respectively, on the sale and securitization of automobile loans. Net trading gains (losses) associated with related interest swaps amounted to $2,627, ($60) and $31 in 2008, 2007, and 2006,
respectively.
Net gains (losses) associated with the retained
interests, held in the form of interest-only strips amounted to ($1,743) in 2008, ($1,940) in 2007 and $866 in 2006 and are included in Net Investment Securities Gains in the Consolidated Statements of Income. During 2008, 2007 and 2006, the
Corporation realized $229, $1,001 and $4,021 in gains that were offset by impairment losses of $1,972, $2,941 and $3,155, respectively. The gains realized in 2008, 2007 and 2006 resulted from the excess of cash received over the carrying amount of
certain interest-only strips. The impairments in 2008, 2007 and 2006 were the result of the differences between the actual credit losses experienced compared to the expected credit losses used in measuring certain interest-only strips. Those
impairments were deemed to be other than temporary.
Retained
interests and other assets consisted of the following at December 31:
|
|
|
|
|
|
|
|
|
2008
|
|
2007
|
Interestonly strips
|
|
$
|
5,903
|
|
$
|
9,030
|
Cash collateral accounts
|
|
|
32,158
|
|
|
18,784
|
Servicing advances
|
|
|
86
|
|
|
132
|
|
|
|
|
|
|
|
Total retained interests
|
|
$
|
38,147
|
|
$
|
27,946
|
|
|
|
|
|
|
|
At December 31,
2008, key economic assumptions and the sensitivity of the current fair value of residual cash flows to immediate 10 percent and 20 percent adverse changes in those assumptions are as follows ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adverse Change
in Assumptions
|
|
|
|
|
|
10%
|
|
20%
|
Weighted average life of collateral (in months)
|
|
16.3
|
|
|
|
|
|
|
|
Prepayment speed (CPR)
|
|
16-40
|
%
|
|
$
|
0.3
|
|
$
|
0.7
|
Expected credit losses (based on original balance)
|
|
0.55-3.65
|
%
|
|
|
0.2
|
|
|
0.5
|
Residual cash flows discount rate (annual)
|
|
12.0
|
%
|
|
|
0.1
|
|
|
0.1
|
These sensitivities
are hypothetical and should be used with caution. As the figures indicate, changes in fair value based on a 10 percent adverse variation in assumptions generally can not be extrapolated because the relationship of the change in assumption to the
change in fair value may not be linear. Also, the effect of an adverse variation in a particular assumption on the fair value of the retained interest is calculated without changing any other assumption. Realistically, changes in one factor may
result in changes in another (for example, increases in market interest rates may result in lower prepayments and increased credit losses), which might magnify or counteract the sensitivities.
95
Notes to Consolidated Financial Statements(Continued)
December 31, 2008, 2007, and 2006 ($000s except share data)
Actual and projected net credit losses represented 1.54% of
total automobile loans that have been securitized at December 31, 2008, based on original balances at the time of the initial securitization.
The following table summarizes certain cash flows received from and paid to the securitization entities for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
Proceeds from new securitizations
|
|
$
|
|
|
|
$
|
168,812
|
|
Servicing fees received
|
|
|
3,431
|
|
|
|
4,897
|
|
Net charge-offs
|
|
|
(7,836
|
)
|
|
|
(7,629
|
)
|
Cash collateral account transfers, net
|
|
|
(13,374
|
)
|
|
|
433
|
|
Other cash flows received on retained interests, net
|
|
|
2,206
|
|
|
|
9,362
|
|
At December 31,
2008 securitized automobile loans and other automobile loans managed together with them along with delinquency and credit loss information consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
Securitized
|
|
Portfolio
|
|
Total
Managed
|
Loan balances
|
|
$
|
339,479
|
|
$
|
540,130
|
|
$
|
879,609
|
Principal amounts of loans 60 days or more past due
|
|
|
3,323
|
|
|
1,211
|
|
|
4,534
|
Net credit losses
|
|
|
7,591
|
|
|
2,044
|
|
|
9,635
|
The Corporation is
committed to community reinvestment and is required under federal law to take affirmative steps to meet the credit needs of the local communities it serves. For this purpose, the Corporation holds variable interests in variable interest entities.
The Corporation regularly invests in or lends to entities that: own residential facilities that provide housing for low-to-moderate income families (affordable housing projects); own commercial properties that are involved in historical
preservations (rehabilitation projects); or provide funds for qualified low income community investments. These projects are generally located within the geographic markets served by the Corporations banking segment. The Corporations
involvement in these entities is limited to providing funding in the form of subordinated debt or equity interests. At December 31, 2008, the aggregate carrying value of investments in the form of subordinated debt amounted to $4,800 and
represented an involvement in thirteen unrelated entities.
Generally, the economic benefit from the equity investments consists of the income tax benefits obtained from the Corporations allocated operating losses from the partnership that are tax deductible, allocated income tax credits for
projects that qualify under the Internal Revenue Code and in some cases, participation in the proceeds from the eventual disposition of the property. The Corporation uses the equity method of accounting to account for these investments. To the
extent a project qualifies for income tax credits, the project must continue to qualify as an affordable housing project for fifteen years, a rehabilitation project for five years, or a qualified low income community investment for seven years in
order to avoid recapture of the income tax credit which generally defines the time the Corporation will be involved in a project.
The Corporations maximum exposure to loss as a result of its involvement with these entities is generally limited to the carrying value of these
investments plus any unfunded commitments on projects that are not completed. At December 31, 2008, the aggregate carrying value of the subordinated debt and equity investments was $43,480 and the amount of unfunded commitments outstanding was
$29,733.
96
Notes to Consolidated Financial Statements(Continued)
December 31, 2008, 2007, and 2006 ($000s except share data)
10. Premises and Equipment
The composition of premises and equipment at December 31 was:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
Land
|
|
$
|
137,265
|
|
|
$
|
121,483
|
|
Building and leasehold improvements
|
|
|
585,485
|
|
|
|
508,090
|
|
Furniture and equipment
|
|
|
309,326
|
|
|
|
289,959
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,032,076
|
|
|
|
919,532
|
|
Accumulated depreciation
|
|
|
(467,287
|
)
|
|
|
(449,653
|
)
|
|
|
|
|
|
|
|
|
|
Total Premises and Equipment, Net
|
|
$
|
564,789
|
|
|
$
|
469,879
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense
from continuing operations was $44,160 in 2008, $43,117 in 2007, and $42,408 in 2006.
The Corporation leases certain of its facilities and equipment. Rent expense under such operating leases was $37,270 in 2008, $29,172 in 2007, and $23,751 in 2006.
The future minimum lease payments under operating leases that have initial or
remaining noncancellable lease terms in excess of one year for 2009 through 2013 are $29,065, $26,266, $22,518, $20,950, and $18,979, respectively.
11. Goodwill and Other Intangibles
Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets
, (SFAS 142) adopts an aggregate
view of goodwill and bases the accounting for goodwill on the units of the combined entity into which an acquired entity is integrated (those units are referred to as Reporting Units). A Reporting Unit is an operating segment as defined in Statement
of Financial Accounting Standards No. 131,
Disclosures about Segments of an Enterprise and Related Information
, or one level below an operating segment.
SFAS 142 provides guidance for impairment testing of goodwill and intangible assets that are not amortized. Other than goodwill, the
Corporation does not have any other intangible assets that are not amortized. Goodwill is tested for impairment using a two-step process that begins with an estimation of the fair value of a Reporting Unit. The first step is a screen for potential
impairment and the second step measures the amount of impairment, if any. Based on the test performed at the end of the fourth quarter of 2008, the Wealth Management segment which consists of the Trust, Private Banking and Brokerage reporting units,
and the Capital Markets reporting unit did not have indicators of potential impairment based on the estimated fair value of those reporting Units.
Based on their estimated fair values, the Commercial and Community Banking segments and the National Consumer Banking Reporting Unit had indicators of
potential impairment and were subjected to the second step of goodwill impairment testing. The deterioration in the national real estate markets, economic recession and disruption in the capital markets had the greatest adverse affect on these
segments. As a result of applying the second step of the test, the National Consumer Banking Reporting Unit had no goodwill impairment, but the Commercial Banking segment and the Community Banking segment recorded goodwill impairment in 2008.
The changes in carrying amount of goodwill for the twelve
months ended December 31, 2008 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
Banking
|
|
|
Community
Banking
|
|
|
Wealth
Management
|
|
Others
|
|
Total
|
|
Goodwill balance as of December 31, 2007
|
|
$
|
922,264
|
|
|
$
|
560,332
|
|
|
$
|
114,572
|
|
$
|
87,777
|
|
$
|
1,684,945
|
|
Goodwill acquired during the year
|
|
|
330,570
|
|
|
|
82,178
|
|
|
|
39,209
|
|
|
|
|
|
451,957
|
|
Purchase accounting adjustments
|
|
|
46
|
|
|
|
|
|
|
|
3,340
|
|
|
|
|
|
3,386
|
|
Reallocation of goodwill
|
|
|
|
|
|
|
(33,000
|
)
|
|
|
|
|
|
33,000
|
|
|
|
|
Goodwill impairment
|
|
|
(925,634
|
)
|
|
|
(609,510
|
)
|
|
|
|
|
|
|
|
|
(1,535,144
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill balance as of December 31, 2008
|
|
$
|
327,246
|
|
|
$
|
|
|
|
$
|
157,121
|
|
$
|
120,777
|
|
$
|
605,144
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
97
Notes to Consolidated Financial Statements(Continued)
December 31, 2008, 2007, and 2006 ($000s except share data)
Goodwill acquired during 2008 included initial goodwill of
$412,748 for the acquisition of First Indiana and $39,209 for the purchase of Taplin, Canida & Habacht, Inc.
Purchase accounting adjustments are the adjustments to the initial goodwill recorded at the time an acquisition is completed. Such adjustments generally
consist of adjustments to the assigned fair value of the assets acquired and liabilities assumed resulting from the completion of appraisals or other valuations, adjustments to initial estimates recorded for transaction costs or exit liabilities, if
any, and the reduction of goodwill allocated to sale transactions. Purchase accounting adjustments of $3,340 for the Wealth Management segment represent adjustments made to the initial estimates of fair value associated with the acquisition of North
Star and a reduction due to the divestiture of a component of North Star.
During 2008 management consolidated certain lending activities and transferred the assets and the related goodwill from the Community Banking segment to the National Consumer Banking Division reporting unit, which is
a component of Others.
The table below reflects the operating
segments as organized prior to the Separation. The changes in the carrying amount of goodwill for the twelve months ended December 31, 2007 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Banking
|
|
|
Others
|
|
Total
|
|
Goodwill balance as of December 31, 2006
|
|
$
|
1,425,197
|
|
|
$
|
29,056
|
|
$
|
1,454,253
|
|
Goodwill acquired during the period
|
|
|
228,076
|
|
|
|
16,747
|
|
|
244,823
|
|
Purchase accounting adjustments
|
|
|
(14,362
|
)
|
|
|
231
|
|
|
(14,131
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill balance as of December 31, 2007
|
|
$
|
1,638,911
|
|
|
$
|
46,034
|
|
$
|
1,684,945
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended
December 31, 2007, purchase accounting adjustments for Banking represent adjustments related to the initial goodwill recorded for Gold Banc and Trustcorp, a reduction in goodwill allocated to the divestiture of the Tulsa, Oklahoma branches, and
reduction in goodwill related to the divestiture of an insignificant business line. Purchase accounting adjustments for the Others segment includes adjustments to the initial goodwill for the trust reporting unit of Gold Banc.
The Corporations other intangible assets consisted of the following at
December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Carrying
Value
|
|
Accumulated
Amortization
|
|
|
Net
Carrying
Value
|
|
Weighted
Average
Amortiza-
tion
Period
(Yrs)
|
Other intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Core deposit intangible
|
|
$
|
254,229
|
|
$
|
(134,008
|
)
|
|
$
|
120,221
|
|
6.2
|
Trust customers
|
|
|
11,384
|
|
|
(4,049
|
)
|
|
|
7,335
|
|
6.9
|
Tradename
|
|
|
1,335
|
|
|
(453
|
)
|
|
|
882
|
|
5.0
|
Other intangibles
|
|
|
29,047
|
|
|
(1,583
|
)
|
|
|
27,464
|
|
9.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
295,995
|
|
$
|
(140,093
|
)
|
|
$
|
155,902
|
|
6.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loan servicing rights
|
|
|
|
|
|
|
|
|
$
|
2,403
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
98
Notes to Consolidated Financial Statements(Continued)
December 31, 2008, 2007, and 2006 ($000s except share data)
The Corporations other intangible assets consisted of
the following at December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Carrying
Value
|
|
Accumulated
Amortization
|
|
|
Net
Carrying
Value
|
|
Weighted
Average
Amortiza-
tion
Period
(Yrs)
|
Other intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Core deposit intangible
|
|
$
|
220,674
|
|
$
|
(113,607
|
)
|
|
$
|
107,067
|
|
6.2
|
Trust customers
|
|
|
11,479
|
|
|
(2,924
|
)
|
|
|
8,555
|
|
6.9
|
Tradename
|
|
|
1,360
|
|
|
(189
|
)
|
|
|
1,171
|
|
5.0
|
Other intangibles
|
|
|
4,156
|
|
|
(412
|
)
|
|
|
3,744
|
|
7.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
237,669
|
|
$
|
(117,132
|
)
|
|
$
|
120,537
|
|
6.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loan servicing rights
|
|
|
|
|
|
|
|
|
$
|
2,479
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense
of other acquired intangible assets amounted to $22,982, $19,199 and $17,178 in 2008, 2007 and 2006, respectively. Amortization of mortgage loan servicing rights was $1,300, $1,352 and $1,465 in 2008, 2007 and 2006, respectively.
The estimated amortization expense of other intangible assets and mortgage
loan servicing rights for the next five years are:
|
|
|
|
2009
|
|
$
|
24,705
|
2010
|
|
|
21,430
|
2011
|
|
|
18,905
|
2012
|
|
|
16,660
|
2013
|
|
|
14,858
|
Mortgage loan
servicing rights are subject to the prepayment risk inherent in the underlying loans that are being serviced. The actual remaining life could be significantly different due to actual prepayment experience in future periods.
At December 31, 2008 and 2007, none of the Corporations other
intangible assets were determined to have indefinite lives.
12. Deposits
The composition of deposits at December 31 was:
|
|
|
|
|
|
|
|
|
2008
|
|
2007
|
Noninterest bearing demand
|
|
$
|
6,879,994
|
|
$
|
6,174,281
|
Savings and NOW
|
|
|
14,207,085
|
|
|
13,903,479
|
|
|
|
CDs $100,000 and over
|
|
|
12,301,142
|
|
|
8,075,691
|
Cash flow hedgeInstitutional CDs
|
|
|
27,737
|
|
|
18,027
|
|
|
|
|
|
|
|
Total CDs $100,000 and over
|
|
|
12,328,879
|
|
|
8,093,718
|
|
|
|
Other time deposits
|
|
|
5,743,480
|
|
|
4,412,933
|
Foreign deposits
|
|
|
1,863,703
|
|
|
2,606,943
|
|
|
|
|
|
|
|
Total Deposits
|
|
$
|
41,023,141
|
|
$
|
35,191,354
|
|
|
|
|
|
|
|
99
Notes to Consolidated Financial Statements(Continued)
December 31, 2008, 2007, and 2006 ($000s except share data)
At December 31, 2008 and 2007, brokered deposits amounted
to $11,401,772 and $6,071,679, respectively.
At
December 31, 2008, the scheduled maturities for CDs $100,000 and over, other time deposits, and foreign deposits were:
|
|
|
|
2009
|
|
$
|
9,121,551
|
2010
|
|
|
1,849,158
|
2011
|
|
|
727,954
|
2012
|
|
|
722,928
|
2013 and thereafter
|
|
|
7,486,734
|
|
|
|
|
Total
|
|
$
|
19,908,325
|
|
|
|
|
13. Other Short-term Borrowings
Other Short-term borrowings at December 31 were:
|
|
|
|
|
|
|
|
|
2008
|
|
2007
|
U.S. Treasury demand notesTAF
|
|
$
|
2,500,000
|
|
$
|
|
U.S. Treasury demand notesterm
|
|
|
|
|
|
2,150,000
|
U.S. Treasury demand notes
|
|
|
36,654
|
|
|
98,113
|
Federal Home Loan Bank (FHLB) note payable
|
|
|
260,000
|
|
|
260,000
|
Senior bank notes
|
|
|
22,000
|
|
|
1,227,659
|
Commercial paper
|
|
|
17,264
|
|
|
798,986
|
Other
|
|
|
32,115
|
|
|
13,897
|
|
|
|
|
|
|
|
Other short-term borrowings
|
|
$
|
2,868,033
|
|
$
|
4,548,655
|
|
|
|
|
|
|
|
The United States
Federal Reserve (the Fed) implemented a temporary Term Auction Facility (TAF), which is a program designed to address elevated pressures in short-term funding markets. Under the TAF program, the Fed auctions collateralized
loans to qualified depository institutions. At December 31, 2008, the Corporation had two TAF borrowings outstanding, which included $2.0 billion with a term of 85 days and $0.5 billion with a term of 84 days.
At December 31, 2007, U.S. Treasury demand notes-term represents a note
issued by the U.S. Treasury for treasury, tax and loan. The term of this note was five days.
At December 31, 2008, the FHLB short-term note payable has a fixed interest rate of 1.05% and matured on February 9, 2009. The Corporation was required to pledge mortgage related assets as collateral to the
FHLB to secure the borrowing.
During 2007, holders of
approximately $1.2 billion of the Corporations senior bank notes Extendible Monthly Securities elected not to extend. As a result, the notes due between August 2008 and October 2008 were reclassified from long-term borrowings to
short-term borrowings. This reclassification is considered a non-cash transaction for purposes of the Consolidated Statements of Cash Flows.
The Corporation issues commercial paper in order to meet short-term funding needs. Maturities of commercial paper range from 1 day to 270 days. At
December 31, 2007, commercial paper in the amount of $244,739 represented obligations of M&I LLC that existed prior to the Separation. As of November 1, 2007, the commercial paper program for M&I LLC was closed and a new commercial
paper program was established for the Corporation.
100
Notes to Consolidated Financial Statements(Continued)
December 31, 2008, 2007, and 2006 ($000s except share data)
14. Long-term Borrowings
Long-term borrowings at December 31 were:
|
|
|
|
|
|
|
|
|
2008
|
|
2007
|
Parent Corporation:
|
|
|
|
|
|
|
Medium-term notes Series E, F and MiNotes
|
|
$
|
463,040
|
|
$
|
451,509
|
4.375% senior notes
|
|
|
599,653
|
|
|
599,080
|
5.626% senior notes
|
|
|
399,323
|
|
|
398,162
|
Floating rate subordinated notes
|
|
|
32,709
|
|
|
33,612
|
7.50% subordinated notes
|
|
|
22,331
|
|
|
|
5.80% junior subordinated deferrable interest debentures
|
|
|
15,896
|
|
|
15,583
|
Floating rate junior subordinated deferrable interest debentures
|
|
|
30,119
|
|
|
30,475
|
6.00% junior subordinated deferrable interest debentures
|
|
|
37,883
|
|
|
37,767
|
10.60% junior subordinated deferrable interest debentures
|
|
|
15,887
|
|
|
16,394
|
Floating rate junior subordinated deferrable interest debentures
|
|
|
|
|
|
10,000
|
Floating rate junior subordinated deferrable interest debentures
|
|
|
|
|
|
5,000
|
|
|
|
Subsidiaries:
|
|
|
|
|
|
|
Borrowings from Federal Home Loan Bank (FHLB):
|
|
|
|
|
|
|
Floating rate advances
|
|
|
1,591,900
|
|
|
800,000
|
Cash flow hedgeFHLB advances
|
|
|
98,430
|
|
|
38,331
|
|
|
|
|
|
|
|
Floating rate advances
|
|
|
1,690,330
|
|
|
838,331
|
Fixed rate advances
|
|
|
1,685,257
|
|
|
1,780,639
|
Senior bank notes:
|
|
|
|
|
|
|
Floating rate bank notes
|
|
|
1,129,172
|
|
|
1,749,316
|
Cash flow hedgeFloating rate bank notes
|
|
|
30,666
|
|
|
13,034
|
|
|
|
|
|
|
|
Floating rate bank notes
|
|
|
1,159,838
|
|
|
1,762,350
|
Fixed rate bank notes
|
|
|
1,075,123
|
|
|
1,923,377
|
Senior bank notesAmortizing bank notes
|
|
|
36,357
|
|
|
72,692
|
Senior bank notesExtendible Monthly Securities
|
|
|
|
|
|
21,993
|
Subordinated bank notes:
|
|
|
|
|
|
|
Floating rate subordinated bank notes
|
|
|
600,000
|
|
|
600,000
|
Fixed rate subordinated bank notes
|
|
|
1,276,759
|
|
|
1,275,497
|
3.875% bank notesFarmer Mac
|
|
|
472,937
|
|
|
|
Nonrecourse notes
|
|
|
62
|
|
|
265
|
Other
|
|
|
213
|
|
|
52
|
|
|
|
|
|
|
|
Total long-term borrowings
|
|
$
|
9,613,717
|
|
$
|
9,872,778
|
|
|
|
|
|
|
|
At December 31,
2008, Series E notes outstanding amounted to $79,975 with fixed rates of 4.50% to 5.02%. Series E notes outstanding mature at various times and amounts through 2023. At December 31, 2008, the Series F note outstanding amounted to $250,000 with
a fixed rate of 5.35%. The Series F note matures in 2011. The MiNotes, issued in minimum denominations of one thousand dollars or integral multiples of one thousand dollars, may have maturities ranging from nine months to 30 years and may be at
fixed or floating rates. At December 31, 2008, MiNotes outstanding amounted to $137,180 with fixed rates ranging from 3.40% to 6.30%. MiNotes outstanding mature at various times through 2038.
The Corporation issued $600 million of 4.375% senior notes in 2004. Interest
is paid semi-annually and the notes mature on August 1, 2009.
During 2007, the Corporation remarketed the 3.90% STACKS
SM
of M&I Capital Trust B that were originally issued in 2004 as components of the Corporations 6.50% Common SPACES
SM
. In connection with the remarketing,
101
Notes to Consolidated Financial Statements(Continued)
December 31, 2008, 2007, and 2006 ($000s except share data)
the annual interest rate on the remarketed STACKS was reset at 5.626%, M&I Capital Trust B was liquidated and $400 million of 5.626% senior notes that
mature on August 17, 2009 were issued by the Corporation in exchange for the outstanding STACKS. Each Common SPACES also included a stock purchase contract requiring the holder to purchase, in accordance with a settlement rate formula, shares
of the Corporations common stock. The Corporation issued 9,226,951 shares of its common stock in settlement of the stock purchase contracts in exchange for $400.0 million in cash.
The Corporations floating rate subordinated-debt securities mature November 2011 and pay interest semiannually at a
variable rate, based upon six-month LIBOR plus 3.75%. At December 31, 2008, 40% of the subordinated notes qualified as Tier 2 or supplementary capital for regulatory capital purposes.
In conjunction with the acquisition of First Indiana, the Corporation assumed
$22,500 of subordinated notes maturing in November 2013. These subordinated notes carry a fixed interest rate of 7.50% with interest payable semiannually. At December 31, 2008, 80% of the subordinated notes qualified as Tier 2 or
supplementary capital for regulatory capital purposes.
In
conjunction with the acquisitions of Gold Banc, Trustcorp, Excel and First Indiana, M&I LLC acquired all of the common interests in trusts that issued cumulative preferred capital securities that are supported by junior subordinated deferrable
interest debentures. These trusts are 100% owned unconsolidated finance subsidiaries of the Corporation. M&I LLC has fully and unconditionally guaranteed the securities that the trusts have issued. The junior subordinated deferrable interest
debentures qualify as Tier 1 capital for regulatory capital purposes.
Gold Banc Trust III was formed in March 2004, and issued $16,000 of trust-preferred securities to institutional investors. Gold Banc Trust III used the proceeds from the issuance of the trust-preferred securities, as
well as Gold Bancs $495 capital investment in the trust, to purchase $16,495 of junior subordinated debt securities issued by Gold Banc. The debentures mature on April 23, 2034, and may be redeemed, at the option of the Corporation after
April 23, 2009. The interest rate of the debentures is fixed at 5.80% for a five-year period through April 23, 2009. Thereafter, interest is at a floating rate equal to the three-month London Inter-Bank Offered Rate (LIBOR)
plus 2.75%, adjustable quarterly. Interest is payable quarterly. The dividend rate on the trust-preferred securities is identical to the interest rate of the related junior subordinated deferrable interest debentures.
Gold Banc Trust IV was formed in March 2004, and issued $30,000 of
trust-preferred securities to institutional investors. Gold Banc Trust IV used the proceeds from the issuance of the trust-preferred securities, as well as Gold Bancs $928 capital investment in the trust, to purchase $30,928 of floating rate
junior subordinated debt securities issued by Gold Banc. The debentures mature on April 7, 2034 and may be redeemed, at the option of the Corporation after April 7, 2009. The interest rate of the debentures is a floating rate equal to
three-month LIBOR plus 2.75%, adjustable quarterly. Interest is payable quarterly. The dividend rate on the trust-preferred securities is identical to the interest rate of the related junior subordinated deferrable interest debentures.
Gold Banc Capital Trust V was formed in November 2004, and issued $38,000
of trust-preferred securities to institutional investors. Gold Banc Capital Trust V used the proceeds from the issuance of the trust-preferred securities, as well as Gold Bancs $1,176 capital investment in the trust, to purchase $39,176 of
junior subordinated deferrable interest debentures issued by Gold Banc. The debentures mature on December 15, 2034, and may be redeemed, at the option of the Corporation after December 15, 2009. The interest rate of the debentures is fixed
at 6.00% for a five-year period through December 15, 2009. Thereafter, interest is at a floating rate equal to three-month LIBOR plus 2.10%, adjustable quarterly. Interest is payable quarterly. The dividend rate on the trust-preferred
securities is identical to the interest rate of the related junior subordinated deferrable interest debentures.
Trustcorp Statutory Trust I was formed in August 2000, and issued $15,000 of 10.60% Cumulative Preferred Trust Securities. Trustcorp Statutory Trust I
used the proceeds from the issuance of the cumulative preferred trust securities, as well as Trustcorps $464 capital investment in the trust, to purchase $15,464 of junior subordinated
102
Notes to Consolidated Financial Statements(Continued)
December 31, 2008, 2007, and 2006 ($000s except share data)
deferrable interest debentures issued by Trustcorp. The debentures mature on September 7, 2030. Interest is payable semi-annually. The dividend rate on
the cumulative preferred trust securities is identical to the interest rate of the related junior subordinated deferrable interest debentures.
During 2008, the Corporation called $15 million in aggregate principal amount of its floating rate junior subordinated deferrable interest debentures and
the related $10 million EBC Statutory Trust I trust preferred securities and $5 million EBC Statutory Trust II trust preferred securities. No gain or loss was recognized as a result of these transactions.
In conjunction with the acquisition of First Indiana, the Corporation
acquired the common interest in a trust that issued cumulative preferred securities and the related $12,000 junior subordinated deferrable debentures. During 2008, the Corporation called $12 million in principal amount of these debentures and the
related cumulative preferred capital securities. No gain or loss was recognized as a result of this transaction.
On November 6, 2007, new Marshall & Ilsley Corporation filed a shelf registration statement pursuant to which the Corporation was initially
authorized to raise up to $1.9 billion through sales of corporate debt and/or equity securities with a relatively short lead time.
As a result of the Separation on November 1, 2007, Marshall & Ilsley Corporation (Accounting Predecessor to new Marshall & Ilsley
Corporation) became M&I LLC and all amounts remaining under existing shelf registration statements were deregistered. There will be no further issuances of debt by M&I LLC.
At December 31, 2008, floating rate FHLB advances outstanding mature at various times between 2011 and 2018. The
interest rate is reset monthly based on one-month LIBOR. Fixed rate FHLB advances have interest rates, which range from 3.50% to 8.47% and mature at various times in 2009 through 2026.
The Corporation is required to maintain unencumbered first mortgage loans and mortgage-related securities such that the
outstanding balance of FHLB advances does not exceed 85% (70% for multi-family and 50% for home equity loans) of the book value of this collateral. In addition, a portion of these advances are collateralized by all FHLB stock.
The floating rate senior bank notes have interest rates based on one-month or
three-month LIBOR with a spread that ranges from a plus 0.11% to a plus 0.30%. Interest payments are either monthly or quarterly. The floating rate senior bank notes outstanding mature at various times and amounts from 2009 to 2011.
The fixed rate senior bank notes have interest rates, which range from 2.90%
to 5.52% and pay interest semi-annually. The fixed rate senior bank notes outstanding mature at various times and amounts from 2009 through 2017.
The senior bank notes Amortizing have a maturity date of August 18, 2009. The senior bank notes pay interest semi-annually at a fixed
semi-annual coupon interest rate of 2.90%. In addition, principal in the amount of $18,182 is paid every coupon payment period beginning on August 18, 2004 and ending on August 18, 2009.
During 2007, M&I Bank issued $600 million of floating rate subordinated
bank notes. The notes mature in 2012 and have an interest rate based on the three-month LIBOR plus 0.27%, adjustable quarterly. Interest is payable quarterly. At December 31, 2008, 60% of the floating rate subordinated bank notes qualified as
Tier 2 or supplementary capital for regulatory capital purposes.
The fixed rate subordinated bank notes have interest rates that range from 4.85% to 7.88% and mature at various times in 2010 through 2020. Interest is paid semi-annually. A portion of these notes qualify as
Tier 2 or supplementary capital for regulatory capital purposes.
During 2008, M&I Bank issued $475 million of agricultural mortgage backed notes due August 19, 2011. These notes carry an unconditional guarantee of principal and interest and are secured by Federal
Agricultural Mortgage Corporation (Farmer Mac). The interest rate is fixed at 3.875% and payable semi-annually.
103
Notes to Consolidated Financial Statements(Continued)
December 31, 2008, 2007, and 2006 ($000s except share data)
The nonrecourse notes are reported net of prepaid interest and
represent borrowings by the commercial leasing subsidiary from banks and other financial institutions. These notes have a weighted average interest rate of 5.04% at December 31, 2008 and are due in installments over varying periods through
2009. Lease financing receivables at least equal to the amount of the notes are pledged as collateral.
During 2008, the Corporation completed buybacks of $169,169 in senior bank notes. The Corporation realized a gain of $14,718, which is included in the
Corporations Consolidated Statements of Income as Gain on Termination of Debt.
In December 2007, the Corporation purchased the right to remarket the Puttable Reset Securities (PURS) and retired the outstanding notes. The Corporation realized a loss of $74,184, which is included in
Losses on Termination of Debt in the Corporations Consolidated Statements of Income for the year ended December 31, 2007.
During 2007, the Corporations 7.65% junior subordinated deferrable interest debentures and the related M&I Capital Trust A 7.65% cumulative
preferred capital securities were called and M&I Capital Trust A was liquidated. The loss of $9,478 associated with the call is included in Losses on Termination of Debt in the Corporations Consolidated Statements of Income for the year
ended December 31, 2007. The loss was primarily due to the contractual call premium paid to retire the debentures and trust preferred securities.
Scheduled maturities of long-term borrowings are $2,086,250, $1,217,361, $2,303,321, $1,441,494 and $572,507 for 2009 through 2013, respectively.
FDICs Temporary Liquidity Guarantee Program
On December 5, 2008, the Corporation announced
that it and its eligible affiliates will be participating in the two components of the FDICs Temporary Liquidity Guarantee Programthe Debt Guarantee Program (the DGP) and the Transaction Account Guarantee Program (the
TAGP).
Under the DGP, certain senior unsecured
debt issued by M&I and its eligible affiliates will be guaranteed by the FDIC, and the debt will be backed by the full faith and credit of the United States. The expiration date of the FDICs guarantee is the earlier of the maturity date of
the debt or June 30, 2012.
Under the TAGP, through
December 31, 2009, all noninterest-bearing transaction accounts (which the TAGP defines as including all noninterest-bearing personal and business checking accounts, NOW accounts earning no more than 0.5 percent interest, and Interest on Lawyer
Trust Accounts) held at M&Is affiliate banks, M&I Bank, M&I Bank FSB, and Southwest Bank, an M&I Bank, are fully guaranteed by the FDIC for the entire amount in the account. Coverage under the TAGP is in addition to and
separate from the coverage available under the FDICs general deposit rules.
15. Shareholders Equity
The Corporation
has 5,000,000 shares of preferred stock authorized, with a par value of $1.00 per share. At December 31, 2008, there were 1,715,000 shares of Senior Preferred Stock, Series B issued and outstanding with a liquidation preference of $1,000.00 per
share.
On November 14, 2008, as part of the United States
Treasury Departments (the UST) Capital Purchase Program (CPP), the Corporation entered into a Letter Agreement with the UST. Pursuant to the Securities Purchase AgreementStandard Terms (the Securities
Purchase Agreement) attached to the Letter Agreement, the Corporation sold 1,715,000 shares of the Corporations Senior Preferred Stock, Series B (the Senior Preferred Stock), having a liquidation preference of $1,000 per
share, for a total price of $1,715 million. The Senior Preferred Stock will qualify as Tier 1 capital and pay cumulative compounding dividends at a rate of 5% per year for the first five years and 9% per year thereafter.
104
Notes to Consolidated Financial Statements(Continued)
December 31, 2008, 2007, and 2006 ($000s except share data)
The Securities Purchase Agreement provided that the
Corporation may not redeem the Senior Preferred Stock during the first three years except with the proceeds from one or more Qualified Equity Offerings (as defined in the Securities Purchase Agreement), and that after three years, the
Corporation may redeem shares of the Senior Preferred Stock for the per share liquidation preference of $1,000 plus any accrued and unpaid dividends. Pursuant to the American Recovery and Reinvestment Act of 2009 (the ARRA), which was
signed into law in February 2009, CPP participants are permitted to repay assistance received under the CPP at any time, subject to consultation with the appropriate federal banking agency. However, the Corporations Restated Articles of
Incorporation contain the redemption restrictions contained in the Securities Purchase Agreement. The Corporation may seek to amend the Restated Articles of Incorporation in the future to remove the restrictions in accordance with the ARRA.
As long as any Senior Preferred Stock is outstanding, the
Corporation may pay quarterly common stock cash dividends of up to $0.32 per share, and may redeem or repurchase its common stock, provided that all accrued and unpaid dividends for all past dividend periods on the Senior Preferred Stock are fully
paid. Prior to the third anniversary of the USTs purchase of the Senior Preferred Stock, unless Senior Preferred Stock has been redeemed or the UST has transferred all of the Senior Preferred Stock to third parties, the consent of the UST will
be required for the Corporation to increase its common stock dividend to more than $0.32 per share per quarter or repurchase its common stock or other equity or capital securities, other than in connection with benefit plans consistent with past
practice and certain other circumstances specified in the Securities Purchase Agreement. The Senior Preferred Stock will be non-voting except for class voting rights on matters that would adversely affect the rights of the holders of the Senior
Preferred Stock.
As a condition to participating in the CPP,
the Corporation issued and sold to the UST a warrant (the Warrant) to purchase 13,815,789 shares (the Warrant Shares) of the Corporations common stock, at an initial per share exercise price of $18.62, for an aggregate
purchase price of approximately $257.25 million. The term of the Warrant is ten years. The Warrant will not be subject to any contractual restrictions on transfer, provided that the UST may only transfer a portion or portions of the Warrant with
respect to, or exercise the Warrant for, more than one-half of the initial Warrant Shares prior to the earlier of (a) the date on which the Corporation has received aggregate gross proceeds of at least $1,715 million from one or more Qualified
Equity Offerings, (b) December 31, 2009. If the Corporation completes one or more Qualified Equity Offerings on or prior to December 31, 2009 that result in the Corporation receiving aggregate gross proceeds equal to at least $1,715
million, then the number of Warrant Shares will be reduced to 50% of the original number of Warrant Shares. The Warrant provides for the adjustment of the exercise price and the number of Warrant Shares issuable upon exercise pursuant to customary
anti-dilution provisions, such as upon stock splits or distributions of securities or other assets to holders of the Corporations common stock, and upon certain issuances of the Corporations common stock at or below a specified price
range relative to the initial exercise price. Pursuant to the Securities Purchase Agreement, the UST has agreed not to exercise voting power with respect to any shares of common stock issued upon exercise of the Warrant.
Pursuant to the Securities Purchase Agreement, until the UST no longer owns
any shares of the Senior Preferred Stock, the Warrant or Warrant Shares, the Corporations employee benefit plans and other executive compensation arrangements for its Senior Executive Officers must continue to comply in all respects with
Section 111(b) the EESA and the rules and regulations of the UST promulgated thereunder.
The Securities Purchase Agreement permits the UST to unilaterally amend any provision of the Letter Agreement and the Securities Purchase Agreement to the extent required to comply with any changes in the applicable
Federal statutes.
For accounting purposes, the proceeds of
$1,715 million were allocated between the preferred stock and the warrant based on their relative fair values. The initial value assigned to the Warrant, which is classified as equity, was $81.12 million. The entire discount on the Senior Preferred
Stock, created from the initial value assigned to the Warrant, will be accreted over a five year period in a manner that produces a level preferred stock dividend yield which is 6.10%. At the end of the fifth year, the carrying amount of the Senior
Preferred Stock will equal its liquidation value.
105
Notes to Consolidated Financial Statements(Continued)
December 31, 2008, 2007, and 2006 ($000s except share data)
During
2004, the Corporation and M&I Capital Trust B issued 16,000,000 units of Common SPACES
SM.
Each unit has a stated value of $25.00 for an
aggregate value of $400.0 million. Each Common SPACES consisted of (i) a stock purchase contract under which the investor agreed to purchase for $25, a fraction of a share of the Corporations common stock on the stock purchase date and
(ii) a 1/40, or 2.5%, undivided beneficial interest in a preferred security of M&I Capital Trust B, also referred to as the STACKS
SM,
with
each share having an initial liquidation amount of $1,000. The stock purchase date was August 15, 2007. Holders of the STACKS were entitled to receive quarterly cumulative cash distributions through the stock purchase date fixed initially at an
annual rate of 3.90% of the liquidation amount of $1,000 per STACKS. In addition, the Corporation was required to make quarterly contract payments under the stock purchase contract at the annual rate of 2.60% of the stated amount of $25 per stock
purchase contract.
During 2007, the Corporation remarketed the
STACKS of M&I Capital Trust B that were originally issued in 2004 as components of the Common SPACES. In connection with the remarketing, the annual interest rate on the remarketed STACKS was reset at 5.626%, M&I Capital Trust B was
liquidated and $400 million of 5.626% senior notes that mature on August 17, 2009 were issued by the Corporation in exchange for the outstanding STACKS. Each Common SPACES also included a stock purchase contract requiring the holder to
purchase, in accordance with a settlement rate formula, shares of the Corporations common stock. Proceeds of the remarketing, after deducting the remarketing fee payable to the remarketing agents, was used to satisfy the obligations of holders
of the Common SPACES to purchase the Corporations common stock under the stock purchase contract. On August 15, 2007, upon settlement of each stock purchase contract, the Corporation delivered 0.5767 shares of common stock for each SPACES
unit, or 9,226,951 shares in total. No fractional shares were issued upon settlement of the stock purchase contracts.
The Corporation issues treasury common stock in conjunction with exercises of stock options and restricted stock, acquisitions, and from time-to-time
issues treasury stock to fund a portion of its retirement plan obligations. Treasury shares are acquired from restricted stock forfeitures, shares tendered to cover tax withholding associated with stock option exercises and vesting of key restricted
stock and mature shares tendered for stock option exercises in lieu of cash. Under its approved share repurchase program, the Corporation is currently authorized to repurchase up to 12 million shares of its common stock per year. During 2008,
the Corporation acquired 4,782,400 shares of its common stock in open market share repurchase transactions under the Stock Repurchase Program. Total cash consideration amounted to $124.9 million. During 2007, the Corporation completed three
accelerated repurchase transactions as well as open market repurchase transactions under its approved share repurchase program. In the aggregate, the Corporation acquired 10,765,889 shares of its common stock in these transactions. Total
consideration in these transactions amounted to $437.1 million and consisted of cash of $434.5 million and common treasury stock valued at $2.6 million. In conjunction with the initial accelerated repurchase transaction executed in 2007, the
Corporation used 54,035 shares of its treasury common stock to share-settle the final settlement obligation. The Corporation repurchased 1.0 million shares with an aggregate cost of $41.8 million in 2006. Participation in the CPP requires the
Corporation to obtain consent from the UST in order to repurchase common shares under its Stock Repurchase Program.
The Corporation sponsors a deferred compensation plan for its non-employee directors and the non-employee directors and advisory board members of its
affiliates. Participants may elect to have their deferred fees used to purchase M&I common stock with dividend reinvestment. Such shares will be distributed to plan participants in accordance with the plan provisions. At December 31, 2008
and 2007, 883,760 and 837,350 shares of M&I common stock, respectively, were held in a grantor trust. The aggregate cost of such shares is included in Deferred Compensation as a reduction of Shareholders Equity in the Consolidated Balance
Sheets and amounted to $16,800 at December 31, 2008 and $18,906 at December 31, 2007.
The Corporation amended its deferred compensation plan for its non-employee directors and selected key employees to permit participants to defer the gain
from the exercise of nonqualified stock options. In addition, the gain upon vesting of restricted common stock to participating executive officers may be deferred. Shares of M&I common stock, which represent the aggregate value of the gains
deferred are maintained in a grantor trust with dividend reinvestment. Such shares will be distributed to plan participants in accordance with the plan provisions. At
106
Notes to Consolidated Financial Statements(Continued)
December 31, 2008, 2007, and 2006 ($000s except share data)
December 31, 2008 and 2007, 921,644 and 686,974 shares of M&I common stock, respectively, were held in the grantor trust. The aggregate cost of such
shares is included in Deferred Compensation as a reduction of Shareholders Equity in the Consolidated Balance Sheets and amounted to $23,977 at December 31, 2008 and $26,453 at December 31, 2007.
Federal banking regulatory agencies established capital adequacy rules which
take into account risk attributable to balance sheet assets and off-balance sheet activities. All banks and bank holding companies must meet a minimum total risk-based capital ratio of 8%. Of the 8% required, at least half must be comprised of core
capital elements defined as Tier 1 capital. The Federal banking agencies also have adopted leverage capital guidelines which banking organizations must meet. Under these guidelines, the most highly rated banking organizations must meet a
minimum leverage ratio of at least 3% Tier 1 capital to total assets, while lower rated banking organizations must maintain a ratio of at least 4% to 5%. Failure to meet minimum capital requirements can result in certain
mandatoryand possibly additional discretionaryactions by regulators that, if undertaken, could have a direct material effect on the Consolidated Financial Statements.
At December 31, 2008 and 2007, the most recent notification from the Federal Reserve Board categorized the Corporation
as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the Corporations category.
To be well capitalized under the regulatory framework, the Tier 1
capital ratio must meet or exceed 6%, the total capital ratio must meet or exceed 10% and the leverage ratio must meet or exceed 5%.
The Corporations risk-based capital and leverage ratios are as follows ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk-Based Capital Ratios
|
|
|
|
As of December 31,
2008
|
|
|
As of December 31,
2007
|
|
|
|
Amount
|
|
Ratio
|
|
|
Amount
|
|
Ratio
|
|
Tier 1 capital
|
|
$
|
5,357.2
|
|
9.49
|
%
|
|
$
|
5,448.4
|
|
10.22
|
%
|
Tier 1 capital adequacy minimum requirement
|
|
|
2,257.1
|
|
4.00
|
|
|
|
2,133.0
|
|
4.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excess
|
|
$
|
3,100.1
|
|
5.49
|
%
|
|
$
|
3,315.4
|
|
6.22
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital
|
|
$
|
7,445.4
|
|
13.19
|
%
|
|
$
|
7,505.0
|
|
14.07
|
%
|
Total capital adequacy minimum requirement
|
|
|
4,514.2
|
|
8.00
|
|
|
|
4,266.0
|
|
8.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excess
|
|
$
|
2,931.2
|
|
5.19
|
%
|
|
$
|
3,239.0
|
|
6.07
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk-adjusted assets
|
|
$
|
56,427.8
|
|
|
|
|
$
|
53,324.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leverage Ratio
|
|
|
|
As of December 31, 2008
|
|
|
As of December 31, 2007
|
|
|
|
Amount
|
|
Ratio
|
|
|
Amount
|
|
Ratio
|
|
Tier 1 capital to adjusted total assets
|
|
$
|
5,357.2
|
|
8.56
|
%
|
|
$
|
5,448.4
|
|
9.46
|
%
|
Minimum leverage adequacy requirement
|
|
|
1,877.63,129.4
|
|
3.005.00
|
|
|
|
1,728.42,880.6
|
|
3.005.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excess
|
|
$
|
3,479.62,227.8
|
|
5.563.56
|
%
|
|
$
|
3,720.02,567.8
|
|
6.464.46
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted average total assets
|
|
$
|
62,587.3
|
|
|
|
|
$
|
57,612.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
2008 and 2007 the estimated deferred tax liabilities that reduced the carrying value of acquired intangibles used in determining Tier 1 capital amounted to $55,884 and $44,563, respectively.
107
Notes to Consolidated Financial Statements(Continued)
December 31, 2008, 2007, and 2006 ($000s except share data)
All of the Corporations banking subsidiaries
risk-based capital and leverage ratios meet or exceed the defined minimum requirements, and have been deemed well capitalized as of December 31, 2008 and 2007. The following table presents the risk-based capital ratios for the
Corporations significant banking subsidiaries:
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1
|
|
|
Total
|
|
|
Leverage
|
|
M&I Marshall & Ilsley Bank
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
8.27
|
%
|
|
12.19
|
%
|
|
7.42
|
%
|
December 31, 2007
|
|
7.88
|
|
|
12.01
|
|
|
7.43
|
|
Southwest Bank, an M&I Bank
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
10.70
|
%
|
|
11.89
|
%
|
|
7.84
|
%
|
December 31, 2007
|
|
10.91
|
|
|
11.76
|
|
|
10.65
|
|
M&I Bank FSB
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
12.72
|
%
|
|
13.72
|
%
|
|
8.74
|
%
|
December 31, 2007
|
|
17.76
|
|
|
18.66
|
|
|
14.77
|
|
Banking subsidiaries
are restricted by banking regulations from making dividend distributions above prescribed amounts and are limited in making loans and advances to the Corporation. At December 31, 2008, the retained earnings of subsidiaries available for
distribution as dividends without regulatory approval, while maintaining well capitalized risk-based capital and leverage ratios, was approximately $149.1 million.
16. Income Taxes
Effective January 1, 2007, the Corporation adopted the provisions of FASB Interpretation No. 48 (FIN 48),
Accounting for
Uncertainty in Income Taxesan 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 process 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.
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 2004.
As of December 31, 2008, the total amount of gross unrecognized tax benefits was $77.7 million, of which $73.6 million
relate to benefits that, if recognized, would impact the annual effective tax rate. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
Balance beginning of year
|
|
$
|
76,697
|
|
|
$
|
76,172
|
|
Additions based on tax positions related to the current year
|
|
|
4,164
|
|
|
|
7,606
|
|
Additions for tax positions of prior years
|
|
|
14,442
|
|
|
|
594
|
|
Reductions for tax positions of prior years
|
|
|
(16,674
|
)
|
|
|
(780
|
)
|
Reductions for lapse of statute of limitations
|
|
|
(865
|
)
|
|
|
(3,867
|
)
|
Settlements
|
|
|
(16
|
)
|
|
|
(3,028
|
)
|
|
|
|
|
|
|
|
|
|
Balance end of year
|
|
$
|
77,748
|
|
|
$
|
76,697
|
|
|
|
|
|
|
|
|
|
|
The Corporation
anticipates it is reasonably possible within twelve months of December 31, 2008, that unrecognized tax benefits of up to approximately $20 million could be realized. The realization would principally result from settlements with taxing
authorities as it relates to the tax benefits associated with a 2002 stock issuance.
108
Notes to Consolidated Financial Statements(Continued)
December 31, 2008, 2007, and 2006 ($000s except share data)
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. The total amount of net interest expense included in the income statement as it pertains to the unrecognized tax benefits for 2008 and 2007 is $2.3 million and $0.5 million, respectively. This amount is net of interest
income received from settlements, reversal of interest expense on lapsing of the statute of limitations, and decreases of prior years positions. Included in the total liability for unrecognized tax benefits as of December 31, 2008 and
2007 is $12.1 million and $6.8 million, respectively, of interest. The Corporation has not accrued any penalties for any unrecognized tax benefits.
Total income tax expense (benefit) for the years ended December 31, 2008, 2007, and 2006 was allocated as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Income (loss) from continuing operations before income taxes
|
|
$
|
(459,525
|
)
|
|
$
|
213,641
|
|
|
$
|
307,435
|
|
Shareholders Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation expense (benefit) for tax purposes in excess of amounts recognized for financial reporting purposes
|
|
|
55
|
|
|
|
(4,251
|
)
|
|
|
(11,430
|
)
|
Unrealized gains (losses) on accumulated other comprehensive income
|
|
|
(60,103
|
)
|
|
|
(19,262
|
)
|
|
|
11,102
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(519,573
|
)
|
|
$
|
190,128
|
|
|
$
|
307,107
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The current and
deferred portions of the provision (benefit) for income taxes of continuing operations were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(157,794
|
)
|
|
$
|
224,580
|
|
|
$
|
254,776
|
State
|
|
|
(16,954
|
)
|
|
|
10,879
|
|
|
|
13,995
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current
|
|
|
(174,748
|
)
|
|
|
235,459
|
|
|
|
268,771
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(275,969
|
)
|
|
|
(22,163
|
)
|
|
|
34,925
|
State
|
|
|
(8,808
|
)
|
|
|
345
|
|
|
|
3,739
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred
|
|
|
(284,777
|
)
|
|
|
(21,818
|
)
|
|
|
38,664
|
|
|
|
|
|
|
|
|
|
|
|
|
Total provision (benefit) for income taxescontinuing operations
|
|
$
|
(459,525
|
)
|
|
$
|
213,641
|
|
|
$
|
307,435
|
|
|
|
|
|
|
|
|
|
|
|
|
The following is a
reconciliation between the amount of the provision (benefit) for income taxes of continuing operations and the amount of tax computed by applying the statutory Federal income tax rate (35%):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Tax computed at statutory rates
|
|
$
|
(876,045
|
)
|
|
$
|
248,703
|
|
|
$
|
334,302
|
|
Increase (decrease) in taxes resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal tax-exempt income
|
|
|
(19,373
|
)
|
|
|
(18,157
|
)
|
|
|
(19,343
|
)
|
State income taxes, net of Federal tax benefit
|
|
|
(16,746
|
)
|
|
|
7,296
|
|
|
|
11,527
|
|
Bank-owned life insurance
|
|
|
(12,579
|
)
|
|
|
(13,211
|
)
|
|
|
(10,197
|
)
|
Non-deductible goodwill
|
|
|
490,730
|
|
|
|
|
|
|
|
|
|
Federal tax credits
|
|
|
(8,969
|
)
|
|
|
(10,166
|
)
|
|
|
(8,801
|
)
|
TEFRA refund claims
|
|
|
(20,000
|
)
|
|
|
|
|
|
|
|
|
Other
|
|
|
3,457
|
|
|
|
(824
|
)
|
|
|
(53
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total provision (benefit) for income taxescontinuing operations
|
|
$
|
(459,525
|
)
|
|
$
|
213,641
|
|
|
$
|
307,435
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
109
Notes to Consolidated Financial Statements(Continued)
December 31, 2008, 2007, and 2006 ($000s except share data)
The tax effects of temporary differences that give rise to
significant elements of the deferred tax assets and deferred tax liabilities at December 31 are as follows:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Deferred compensation
|
|
$
|
65,435
|
|
|
$
|
61,926
|
|
Share-based compensation
|
|
|
80,868
|
|
|
|
73,533
|
|
Allowance for loan and lease losses
|
|
|
499,438
|
|
|
|
201,972
|
|
Accrued postretirement benefits
|
|
|
14,835
|
|
|
|
16,029
|
|
Accrued expenses
|
|
|
22,351
|
|
|
|
38,441
|
|
Deductible goodwill
|
|
|
27,688
|
|
|
|
|
|
Net Operating Loss Carryforwards (NOLs)
|
|
|
62,900
|
|
|
|
43,995
|
|
Accumulated other comprehensive income
|
|
|
88,847
|
|
|
|
28,744
|
|
Other
|
|
|
119,608
|
|
|
|
65,466
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets before valuation allowance
|
|
|
981,970
|
|
|
|
530,106
|
|
Valuation allowance
|
|
|
(135,711
|
)
|
|
|
(80,167
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
|
846,259
|
|
|
|
449,939
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Lease revenue reporting
|
|
|
150,426
|
|
|
|
127,527
|
|
REIT dividends
|
|
|
33,064
|
|
|
|
43,521
|
|
Premises and equipment, principally due to depreciation
|
|
|
23,285
|
|
|
|
18,453
|
|
Deductible goodwill
|
|
|
|
|
|
|
10,950
|
|
Purchase accounting adjustments
|
|
|
47,455
|
|
|
|
33,621
|
|
Other
|
|
|
30,162
|
|
|
|
29,420
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
284,392
|
|
|
|
263,492
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset
|
|
$
|
561,867
|
|
|
$
|
186,447
|
|
|
|
|
|
|
|
|
|
|
The Corporation
continues to carry a valuation allowance to reduce certain state deferred tax assets which include, in part, certain state net operating loss carryforwards which expire at various times through 2023. At December 31, 2008, the Corporation
believes it is more likely than not that these items will not be realized. However, as time passes the Corporation will be able to better assess the amount of tax benefit it will realize from using these items.
In 2006, the Corporation was awarded a $75,000 allocation of tax credit
authority under the Community Development Financial Institutions Fund. Under the program, the Corporation invested $75,000 in a wholly-owned subsidiary, which will make qualifying loans and investments. In return, the Corporation will receive
federal income tax credits that will be recognized over seven years, including the year in which the funds were invested in the subsidiary. The Corporation recognizes these tax credits for financial reporting purposes in the same year the tax
benefit is recognized in the Corporations tax return. The investment resulted in a tax credit that reduced income tax expense by $3,750 in 2008, 2007 and 2006, respectively.
17. Stock Option, Restricted Stock and Employee Stock Purchase Plans
The Corporation has equity incentive plans (collectively, the Equity Incentive Plans) which provide for the
grant of nonqualified and incentive stock options, stock appreciation rights, rights to purchase shares of restricted stock and the award of restricted stock units to key employees and directors of the Corporation at prices ranging from zero to the
market value of the shares at the date of grant. The Equity Incentive Plans generally provide for the grant of options to purchase shares of the Corporations common stock for a period of ten years from the date of grant. Stock options granted
generally become exercisable over a period of three years from the date of grant. However, stock options granted to directors of the Corporation vest immediately and stock options granted after 1996 provide immediate vesting for grants to
individuals who meet certain age and years of service criteria at the date of grant. Restrictions on stock or units issued pursuant to the Equity Incentive Plans generally lapse within a three to seven year period.
110
Notes to Consolidated Financial Statements(Continued)
December 31, 2008, 2007, and 2006 ($000s except share data)
In connection with the Separation, the Corporation and
Metavante entered into an Employee Matters Agreement to allocate between them the assets, liabilities, and responsibilities with respect to certain employee compensation, benefit plans and programs, and certain employment matters with respect to
their employees (the Employee Matters Agreement). On November 1, 2007, in connection with the Separation, the Marshall & Ilsley stock options awarded to Metavante employees and outstanding at November 1, 2007 were
converted to Metavante stock options in accordance with the formula prescribed in the Employee Matters Agreement. Upon the conversion, the outstanding Marshall & Ilsley stock options awarded to Metavante employees were cancelled and are
available for future awards to employees of the Corporation. Marshall & Ilsley stock options awarded to Marshall & Ilsley employees and outstanding at November 1, 2007 were converted to stock options of the New
Marshall & Ilsley in accordance with the formula prescribed in the Employee Matters Agreement. Options issued as a result of the conversion were taken from those available for future awards to employees of the Corporation. On a net basis,
shares available for future award to employees declined by approximately 4.1 million shares as a result of the Separation. The conversion formula was intended to retain, following the Separation, the aggregate spread and the ratio of exercise
price to the share value on the options as the option holders had immediately prior to the Separation, thereby maintaining the intrinsic value of the options. Such options were subject to the same terms and conditions (including vesting) as the
corresponding Marshall & Ilsley option to which it related. The Corporation determined that no incremental stock compensation expense was recognized as a result of the conversion because the fair value of the outstanding option awards
immediately after the Separation was less than the fair value of the option awards immediately before the Separation.
The Corporation also has a long-term incentive plan. Under this plan, performance units may be awarded from time to time. Once awarded, additional
performance units will be credited to each participant based on dividends paid by the Corporation on its common stock. At the end of a designated vesting period, participants will receive a cash award equal to the Corporations average common
stock price over the last five days of the vesting period multiplied by some percent (0%-275%) of the initial performance units credited plus those additional units credited as dividends based on the established performance criteria. The vesting
period is three years from the date the performance units were awarded.
The Corporation also has a qualified employee stock purchase plan (the ESPP) which gives employees (excluding executive officers) who elect to participate in the plan the right to acquire shares of the Corporations common
stock at a purchase price which is 85 percent of the fair market value of the Corporations common stock on the last day of each three month period within the one-year offering period. Employee contributions under the ESPP are made ratably
during the plan period. Employees may withdraw from the plan prior to the end of the one year offering period.
In conjunction with the Separation, Metavante employees that had elected to participate in the ESPP were refunded their accumulated cash balances in
accordance with the Employee Matters Agreement.
Under the fair
value method of accounting, compensation cost is measured at the grant date based on the fair value of the award using an option-pricing model that takes into account the stock price at the grant date, the exercise price, the expected life of the
option, the volatility of the underlying stock, expected dividends and the risk-free interest rate over the expected life of the option. The resulting compensation cost for stock options that vest is recognized over the service period, which is
usually the vesting period.
111
Notes to Consolidated Financial Statements(Continued)
December 31, 2008, 2007, and 2006 ($000s except share data)
Activity relating to nonqualified and incentive stock options
was:
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
|
Option Price
Per Share
|
|
Weighted-
Average
Exercise
Price
|
Shares under option at December 31, 2006
|
|
26,324,536
|
|
|
$
|
5.7148.54
|
|
$
|
35.68
|
Options granted
|
|
4,190,533
|
|
|
|
41.2149.20
|
|
|
42.43
|
Vested options exchanged in acquisition
|
|
649,767
|
|
|
|
8.9634.50
|
|
|
17.37
|
Options lapsed or surrendered
|
|
(310,564
|
)
|
|
|
16.7748.07
|
|
|
44.88
|
Options exercised
|
|
(3,345,900
|
)
|
|
|
5.7145.74
|
|
|
26.82
|
|
|
|
|
|
|
|
|
|
|
Shares under option at October 31, 2007
|
|
27,508,372
|
|
|
$
|
8.5649.20
|
|
$
|
37.25
|
Option conversion due to the Separation
|
|
9,247,773
|
|
|
|
6.4136.82
|
|
|
27.88
|
Options lapsed or surrendered in connection with the Separation
|
|
(5,108,249
|
)
|
|
|
17.0635.98
|
|
|
29.69
|
Options granted
|
|
15,775
|
|
|
|
26.4831.47
|
|
|
29.45
|
Options lapsed or surrendered
|
|
(334,058
|
)
|
|
|
15.5335.98
|
|
|
23.17
|
Options exercised
|
|
(379,458
|
)
|
|
|
11.9926.04
|
|
|
22.37
|
|
|
|
|
|
|
|
|
|
|
Shares under option at December 31, 2007
|
|
30,950,155
|
|
|
$
|
6.4136.82
|
|
$
|
27.70
|
Options granted
|
|
4,821,543
|
|
|
|
11.5029.75
|
|
|
18.92
|
Options lapsed or surrendered
|
|
(1,325,651
|
)
|
|
|
10.2836.06
|
|
|
28.80
|
Options exercised
|
|
(1,007,321
|
)
|
|
|
6.4126.04
|
|
|
18.96
|
|
|
|
|
|
|
|
|
|
|
Shares under option at December 31, 2008
|
|
33,438,726
|
|
|
$
|
8.5536.82
|
|
$
|
26.65
|
|
|
|
|
|
|
|
|
|
|
The range of options
outstanding at December 31, 2008 were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
Weighted-Average
Exercise Price
|
|
Weighted-Average
Aggregate intrinsic Value
|
|
|
Weighted-Average
Remaining Contractual
Life (In
Years)
|
Price Range
|
|
Outstanding
|
|
Exercisable
|
|
Outstanding
|
|
Exercisable
|
|
Outstanding
|
|
|
Exercisable
|
|
|
Outstanding
|
|
Exercisable
|
$ 8.55-18.99
|
|
6,840,071
|
|
2,909,968
|
|
$
|
17.83
|
|
$
|
16.77
|
|
$
|
(4.19
|
)
|
|
$
|
(3.13
|
)
|
|
7.2
|
|
3.7
|
19.00-21.99
|
|
3,080,882
|
|
3,061,082
|
|
|
21.24
|
|
|
21.25
|
|
|
(7.60
|
)
|
|
|
(7.61
|
)
|
|
3.8
|
|
3.7
|
22.00-23.99
|
|
4,722,086
|
|
4,691,216
|
|
|
23.50
|
|
|
23.51
|
|
|
(9.86
|
)
|
|
|
(9.87
|
)
|
|
2.3
|
|
2.2
|
24.00-26.99
|
|
3,038,599
|
|
2,883,932
|
|
|
26.00
|
|
|
26.02
|
|
|
(12.36
|
)
|
|
|
(12.38
|
)
|
|
5.0
|
|
4.8
|
27.00-31.49
|
|
7,249,581
|
|
5,097,889
|
|
|
31.27
|
|
|
31.23
|
|
|
(17.63
|
)
|
|
|
(17.59
|
)
|
|
7.4
|
|
6.8
|
31.50-34.49
|
|
4,884,594
|
|
4,567,162
|
|
|
32.13
|
|
|
32.11
|
|
|
(18.49
|
)
|
|
|
(18.47
|
)
|
|
7.3
|
|
7.3
|
34.50-36.82
|
|
3,622,913
|
|
2,581,415
|
|
|
35.92
|
|
|
35.94
|
|
|
(22.28
|
)
|
|
|
(22.30
|
)
|
|
7.9
|
|
7.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33,438,726
|
|
25,792,664
|
|
$
|
26.65
|
|
$
|
27.05
|
|
$
|
(13.01
|
)
|
|
$
|
(13.41
|
)
|
|
6.1
|
|
5.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at
December 31, 2007 and 2006 were 23,877,880 and 19,826,071, respectively. The weighted-average exercise price for options exercisable was $26.14 at December 31, 2007 and $32.54 at December 31, 2006.
The fair value of each option grant was estimated as of the date of grant
using the Black-Scholes closed form option-pricing model for options granted prior to September 30, 2004. A form of a lattice option-pricing model was used for options granted after September 30, 2004.
112
Notes to Consolidated Financial Statements(Continued)
December 31, 2008, 2007, and 2006 ($000s except share data)
The grant date fair values and assumptions used to determine
such value are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007 (1)
|
|
|
2006
|
|
|
|
Post-Separation
|
|
|
Pre-Separation
|
|
|
Weighted-average grant date fair value
|
|
$
|
6.84
|
|
|
$
|
6.36
|
|
|
$
|
7.39
|
|
|
$
|
9.11
|
|
Assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk-free interest rates
|
|
|
1.56-3.65
|
%
|
|
|
3.71-3.74
|
%
|
|
|
4.10-5.50
|
%
|
|
|
4.22-5.66
|
%
|
Expected volatility
|
|
|
20.90-34.80
|
%
|
|
|
19.90
|
%
|
|
|
16.60-19.90
|
%
|
|
|
18.20-18.50
|
%
|
Expected term (in years)
|
|
|
6.2-7.4
|
|
|
|
6.8-7.2
|
|
|
|
6.5-7.3
|
|
|
|
6.3-7.2
|
|
Expected dividend yield
|
|
|
3.03-4.99
|
%
|
|
|
2.91
|
%
|
|
|
2.33-2.91
|
%
|
|
|
2.20-2.29
|
%
|
(1)
|
|
The data for 2007 has been separated to show the grant date fair values and assumptions prior to and after the Separation.
|
The total intrinsic value of nonqualified and incentive stock options
exercised during the years ended December 31, 2008, 2007 and 2006 was $6.6 million, $72.3 million and $55.2 million, respectively. The total fair value of shares vested during the years ended December 31, 2008, 2007 and 2006 amounted to
$25.5 million, $30.2 million and $47.4 million, respectively.
There was approximately $44.9 million and $33.0 million of total unrecognized compensation expense related to unvested nonqualified and incentive stock options at December 31, 2008 and 2007, respectively. The total unrecognized
compensation expense will be recognized over a weighted average period of 1.6 years. For awards with graded vesting, compensation expense was recognized using an accelerated method prior to the adoption of SFAS 123(R) and is recognized on a straight
line basis for awards granted after the effective date.
For
the years ended December 31, 2008, 2007 and 2006 the expense for nonqualified and incentive stock options that is included in Salaries and Employee Benefits expense in the Consolidated Statements of Income amounted to $23.1 million, $19.5
million and $23.3 million, respectively. These amounts are considered non-cash expenses for the Statements of Cash Flow purposes.
For the years ended December 31, 2008, 2007 and 2006 the expense for directors nonqualified and incentive stock options that is included in
Other Expense in the Consolidated Statements of Income amounted to $0.1 million, $0.2 million and $0.6 million, respectively.
Activity relating to the Corporations Restricted Stock Purchase Rights was:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Restricted stock purchase rights outstandingBeginning of Year
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock purchase rights granted
|
|
|
332,000
|
|
|
|
335,900
|
|
|
|
220,855
|
|
Restricted stock purchase rights exercised
|
|
|
(332,000
|
)
|
|
|
(335,900
|
)
|
|
|
(220,855
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock purchase rights outstandingEnd of Year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average grant date market value
|
|
$
|
19.36
|
|
|
$
|
43.17
|
|
|
$
|
47.21
|
|
Aggregate compensation expense
|
|
$
|
5,799
|
|
|
$
|
9,101
|
|
|
$
|
6,024
|
|
Unamortized deferred compensation
|
|
$
|
14,936
|
|
|
$
|
15,011
|
|
|
$
|
16,686
|
|
Restrictions on stock
issued pursuant to the exercise of restricted stock purchase rights generally lapse within a three to seven year period. Accordingly, the compensation related to issuance of the rights is amortized over the vesting period. At December 31, 2008,
the unamortized compensation expense will be recognized over a weighted average period of 2.1 years. These amounts are considered non-cash expenses for the Consolidated Statements of Cash Flow purposes.
113
Notes to Consolidated Financial Statements(Continued)
December 31, 2008, 2007, and 2006 ($000s except share data)
Marshall & Ilsley restricted common stock outstanding
on November 1, 2007 was converted to shares of common stock of New Marshall & Ilsley and Metavante in the same manner as the other holders of Marshall & Ilsley were converted. Unvested restricted stock is subject to the same
terms and conditions (including vesting) as the corresponding Marshall & Ilsley restricted common stock award to which it related.
Compensation under the long-term incentive plan is paid in cash at the end of the designated vesting period. This plan meets the definition of a liability
award. Unlike equity awards, liability awards are remeasured at fair value at each balance sheet date until settlement. For the years ended December 31, 2008, 2007 and 2006 the expense for the Long-Term Incentive Plan that is included in
Salaries and Employee Benefits expense in the Consolidated Statements of Income amounted to ($4.3) million, $1.6 million and $8.6 million, respectively.
The compensation cost per share for the ESPP was $2.88, $4.24 and $7.44 for the plan years ended December 31, 2008, June 30, 2008 and 2007,
respectively. Employee contributions under the ESPP are made ratably during the plan period. Employees may withdraw from the plan prior to the end of the one year offering period. The total shares to be purchased are estimated at the beginning of
the plan period based on total expected contributions for the plan period and 85% of the market price at that date. During 2008 and 2007, common shares purchased by employees under the ESPP amounted to 579,111 and 375,401, respectively. For the
years ended December 31, 2008, 2007 and 2006 the total expense for the ESPP that is included in Salaries and Employee Benefits expense in the Consolidated Statements of Income amounted to $1.7 million, $1.6 million and $1.8 million,
respectively. These amounts are considered non-cash expenses for the Statements of Cash Flow purposes.
Shares reserved for the granting of options and stock purchase rights at December 31, 2008 were 5,171,362.
18. Employee Retirement and Health Plans
The Corporation has a defined contribution program that consists of a 401(k)
component, including employer matching contributions, and an employer contribution component that is allocated based on compensation. Employee 401(k) contributions into the retirement program of up to 6% of eligible compensation are matched at 50%
by the Corporation. The employer contribution component provides for a guaranteed contribution to eligible participants equal to 2% of compensation. At the Corporations option, an additional amount may also be contributed and may vary from
year to year up to a maximum of an additional 6% of eligible compensation. Total expense relating to these plans was $47,440, $42,650, and $39,702 in 2008, 2007, and 2006, respectively. Effective as of the Separation, employees of Metavante ceased
to be participants in the defined contribution program. The Corporation transferred assets from the trust relating to the Marshall & Ilsley Retirement Program to the trust established for the Metavante profit sharing retirement plan that
was equal to account balances of all Metavante employees and former Metavante employees with an account balance under the Marshall & Ilsley Retirement Program.
The Corporation also has supplemental retirement plans to provide retirement benefits to certain of its key executives. Total expense
relating to these plans amounted to $3,933 in 2008, $3,889 in 2007, and $4,587 in 2006.
The Corporation sponsors a defined benefit health plan that provides health care benefits to eligible current and retired employees. Eligibility for retiree benefits is dependent upon age, years of service, and
participation in the health plan during active service. The plan is contributory and in 1997 and 2002 the plan was amended. Employees hired after September 1, 1997, including employees retained from mergers, will be granted access to the
Corporations 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. During 2008, the
Corporation made an additional contribution to the postretirement medical plan of $1.0 million. The Corporation may make an additional contribution to its plan in 2009.
In accordance with the Employee Matters Agreement, active employees of Metavante Technologies, Inc. exited the Marshall & Ilsley
welfare plans and became covered under new plans adopted by Metavante Technologies, Inc.
114
Notes to Consolidated Financial Statements(Continued)
December 31, 2008, 2007, and 2006 ($000s except share data)
In conjunction with the Separation, current and former
Metavante employees ceased to be participants in the Corporations health plan effective November 1, 2007. A portion of the assets held in a trust that is used to fund such obligations, which included Metavantes contributions made
through November 1, 2007, was transferred by the Corporation to a new trust created by Metavante.
In addition, the Corporation assumed Metavantes obligation to provide postretirement medical benefits to all of Metavantes existing retirees
eligible for such coverage and those retirement-eligible employees that were also eligible for postretirement medical benefits but had not yet retired as of November 1, 2007. The assets held in a trust that is used to fund such obligations,
which included Metavantes contributions made through November 1, 2007, were retained by the Corporation.
The Corporation uses a measurement date of December 31 for its retirement plans. The following table summarizes the accumulated postretirement
benefit obligation (APBO) reflecting Medicare Part D subsidy, and plan asset activity for the retirement plans:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
Change in Benefit Obligation
|
|
|
|
|
|
|
|
|
APBO, beginning of year
|
|
$
|
65,029
|
|
|
$
|
57,303
|
|
Service cost
|
|
|
951
|
|
|
|
976
|
|
Interest cost on APBO
|
|
|
3,936
|
|
|
|
3,358
|
|
Plan participants contributions
|
|
|
3,540
|
|
|
|
2,993
|
|
Actuarial (gains) losses
|
|
|
(3,111
|
)
|
|
|
(1,337
|
)
|
Gross benefits paid
|
|
|
(5,899
|
)
|
|
|
(7,145
|
)
|
Less: Federal subsidy on benefits paid
|
|
|
772
|
|
|
|
722
|
|
Acquisitions/divestitures
|
|
|
1,159
|
|
|
|
8,159
|
|
|
|
|
|
|
|
|
|
|
APBO, end of year
|
|
$
|
66,377
|
|
|
$
|
65,029
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
Change in Plan Assets
|
|
|
|
|
|
|
|
|
Fair value of plan assets, beginning of year
|
|
$
|
32,391
|
|
|
$
|
16,613
|
|
Actual return on plan assets
|
|
|
(5,938
|
)
|
|
|
1,180
|
|
Employer contribution/payments
|
|
|
5,707
|
|
|
|
9,813
|
|
Plan participants contributions
|
|
|
3,540
|
|
|
|
2,993
|
|
Gross benefits paid
|
|
|
(5,899
|
)
|
|
|
(7,145
|
)
|
Acquisitions/divestitures
|
|
|
|
|
|
|
8,937
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets, end of year
|
|
$
|
29,801
|
|
|
$
|
32,391
|
|
|
|
|
|
|
|
|
|
|
Weighted annual discount rate used in determining ABPO
|
|
|
6.00
|
%
|
|
|
6.00
|
%
|
Expected long term rate of retirement plan assets
|
|
|
5.25
|
|
|
|
5.25
|
|
The weighted average
discount rate used in determining the APBO was based on matching the Corporations estimated plan duration to a yield curve derived from a portfolio of high-quality corporate bonds with yields within the 10th to 90th percentiles. The portfolio
consisted of over 500 actual Aa quality bonds at various maturity points across the full maturity spectrum that were all United States issues.
The long term rate used in determining the expected return on retirement plan assets was based on a historical return experience for a diversified asset
allocation of equities and fixed income securities, along with equity and bond indices used for forward looking return projections.
The assumed health care cost trend for 2009 is 8.00% for pre-age 65 and post-age 65 retirees. The rate was assumed to decrease gradually to 5.00% for
pre-age 65 and post-age 65 retirees in 2015 and remain at that level thereafter.
115
Notes to Consolidated Financial Statements(Continued)
December 31, 2008, 2007, and 2006 ($000s except share data)
The 2007 change in benefit obligation and plan assets from
acquisitions/divestitures relate to the Separation.
The funded
status at December 31:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
Funded Status
|
|
|
|
|
|
|
|
|
Fair value of plan assets
|
|
$
|
29,801
|
|
|
$
|
32,391
|
|
Benefit obligations
|
|
|
(66,377
|
)
|
|
|
(65,029
|
)
|
|
|
|
|
|
|
|
|
|
Funded status
|
|
$
|
(36,576
|
)
|
|
$
|
(32,638
|
)
|
|
|
|
|
|
|
|
|
|
At December 31,
2008 and 2007, $36,576 and $32,638, respectively, are included in Accrued Expenses and Other Liabilities in the Consolidated Balance Sheets.
The amounts recognized in accumulated other comprehensive income (pre-tax) for the years ended December 31, 2008 and 2007 consists of:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
Net actuarial loss
|
|
$
|
14,009
|
|
|
$
|
9,428
|
|
Prior service credit
|
|
|
(12,658
|
)
|
|
|
(15,029
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,351
|
|
|
$
|
(5,601
|
)
|
|
|
|
|
|
|
|
|
|
The estimated amounts
that will be amortized from accumulated other comprehensive income into net periodic benefit cost in 2009 are as follows:
|
|
|
|
|
Actuarial loss
|
|
$
|
839
|
|
Prior service credit
|
|
|
(2,238
|
)
|
|
|
|
|
|
Total
|
|
$
|
(1,399
|
)
|
|
|
|
|
|
Net periodic
postretirement benefit cost for the years ended December 31, 2008, 2007 and 2006 includes the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Service cost
|
|
$
|
951
|
|
|
$
|
976
|
|
|
$
|
1,305
|
|
Interest cost on APBO
|
|
|
3,936
|
|
|
|
3,358
|
|
|
|
3,144
|
|
Expected return on plan assets
|
|
|
(1,740
|
)
|
|
|
(1,116
|
)
|
|
|
(716
|
)
|
Prior service amortization
|
|
|
(2,371
|
)
|
|
|
(2,148
|
)
|
|
|
(2,096
|
)
|
Actuarial loss amortization
|
|
|
301
|
|
|
|
416
|
|
|
|
1,065
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic postretirement cost
|
|
$
|
1,077
|
|
|
$
|
1,486
|
|
|
$
|
2,702
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The assumed health
care cost trend rate has a significant effect on the amounts reported for the health care plans. A one-percentage point change on assumed health care cost trend rates would have the following effects:
|
|
|
|
|
|
|
|
|
|
One
Percentage
Point
Increase
|
|
One
Percentage
Point
Decrease
|
|
Effect on accumulated postretirement benefit obligation
|
|
$
|
6,120
|
|
$
|
(5,391
|
)
|
Effect on aggregate service and interest cost
|
|
|
597
|
|
|
(521
|
)
|
116
Notes to Consolidated Financial Statements(Continued)
December 31, 2008, 2007, and 2006 ($000s except share data)
The fair value of the postretirement medical plan assets at
December 31, by asset category are as follows:
|
|
|
|
|
|
|
|
|
2008
|
|
2007
|
Plan Assets by Category
|
|
|
|
|
|
|
Equity mutual fund
|
|
$
|
12,440
|
|
$
|
15,745
|
Fixed income securities
|
|
|
9,868
|
|
|
15,297
|
Cash equivalents
|
|
|
7,493
|
|
|
1,401
|
|
|
|
|
|
|
|
Total
|
|
$
|
29,801
|
|
$
|
32,443
|
|
|
|
|
|
|
|
The Corporations
primary investment objective is to achieve a combination of income and growth of capital through the investment in a diversified portfolio of equity and fixed income securities. The portfolio seeks to maximize potential total return consistent with
minimizing overall volatility. The long-term target asset mix is 50% equities and 50% fixed income securities. At December 31, 2008, the equity mutual fund consisted of a pooled large cap equity fund. This equity mutual fund is valued with
quoted prices in active markets for identical assets, and as such, considered Level 1. The fixed income securities are comprised of a short-term municipal (tax-exempt) fund and a corporate and government bond market index fund. These fixed income
securities are also valued with quoted prices in active markets for identical assets, and is considered Level 1.
Management has established acceptable guidelines for the types of investments held in the portfolio. The acceptable ranges for the long-term allocation of
funds among asset classes within the portfolio are: 40% to 60% equities, 40% to 60% fixed income securities, and 0% to 10% cash reserves. Individual fixed income securities will have maturities of thirty years or less. The average maturity of the
portfolio will not exceed ten years. In order to maintain diversification, management has set limits with regards to holdings of individual investments as a percentage of the total portfolio. Based on the Corporations investment objective, the
asset allocation of the plan assets are aligned with meeting the funding objectives of the benefit obligation of the postretirement plan.
On December 8, 2003 the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act) was signed into law. The Act
introduced a prescription drug benefit program under Medicare (Medicare Part D) as well as a 28% Federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to Medicare Part D.
The following expected benefit payments to be paid, which
reflect future service, as appropriate, are as follows:
|
|
|
|
|
|
|
|
|
|
Total
Without
Medicare
Part D
|
|
Estimated
Medicare
Part D
Subsidy
|
|
2009
|
|
$
|
5,399
|
|
$
|
(781
|
)
|
2010
|
|
|
5,968
|
|
|
(860
|
)
|
2011
|
|
|
6,506
|
|
|
(930
|
)
|
2012
|
|
|
6,867
|
|
|
(998
|
)
|
2013
|
|
|
6,978
|
|
|
(1,045
|
)
|
2014-2018
|
|
|
35,133
|
|
|
(5,420
|
)
|
117
Notes to Consolidated Financial Statements(Continued)
December 31, 2008, 2007, and 2006 ($000s except share data)
19. Financial Instruments with Off-Balance Sheet Risk
Financial instruments with off-balance sheet risk at December 31 were:
|
|
|
|
|
|
|
|
|
2008
|
|
2007
|
Financial instruments whose amounts represent credit risk:
|
|
|
|
|
|
|
Commitments to extend credit:
|
|
|
|
|
|
|
To commercial customers
|
|
$
|
14,968,521
|
|
$
|
15,998,615
|
To individuals
|
|
|
4,525,367
|
|
|
4,321,591
|
Commercial letters of credit
|
|
|
38,152
|
|
|
85,703
|
Mortgage loans sold with recourse
|
|
|
54,558
|
|
|
60,805
|
Credit support agreement
|
|
|
90,000
|
|
|
|
Standby letters of credit
|
|
|
2,952,025
|
|
|
2,496,964
|
Commitments to extend
credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates and may require payment of a fee. The majority of the Corporations
commitments to extend credit generally provide for the interest rate to be determined at the time the commitment is utilized. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements.
The
Corporation evaluates each customers credit worthiness on an individual basis. Collateral obtained, if any, upon extension of credit, is based upon managements credit evaluation of the customer. Collateral requirements and the ability to
access collateral is generally similar to that required on loans outstanding as described in Note 7Loans and Leases in Notes to Consolidated Financial Statements.
Commercial letters of credit are contingent commitments issued by the Corporation to support the financial obligations of a customer to a
third party. Commercial letters of credit are issued to support payment obligations of a customer as buyer in a commercial contract for the purchase of goods. Letters of credit have maturities which generally reflect the maturities of the underlying
obligations. The credit risk involved in issuing letters of credit is the same as that involved in extending loans to customers. If deemed necessary, the Corporation holds various forms of collateral to support letters of credit.
Certain mortgage loans sold have limited recourse provisions. The losses
arising from the limited recourse provisions are not material.
The credit support agreements in which the Corporation and its trust subsidiary, Marshall & Ilsley Trust Company N.A. entered into, represents the maximum aggregate contribution, contingent upon certain criteria, related to the
trusts securities lending activities. See Note 24Guarantees in Notes to Consolidated Financial Statements for further information.
Standby letters of credit are commitments the Corporation issues to guarantee the performance of a customer to a third-party and represent the maximum
potential future obligation guaranteed by the Corporation under these commitments. Standby letters of credit have maturities which generally reflect the maturities of the underlying obligations. The credit risk involved in issuing standby letters of
credit is the same as that involved in extending loans to customers. If deemed necessary, the Corporation holds various forms of collateral to support standby letters of credit. The standby letters of credit are net of participation agreements
conveyed to others.
20. Foreign Exchange Contracts
Foreign exchange contracts are commitments to purchase or deliver foreign
currency at a specified exchange rate. The Corporation enters into foreign exchange contracts primarily in connection with trading activities to enable customers involved in international trade to hedge their exposure to foreign currency
fluctuations and to minimize the Corporations own exposure to foreign currency fluctuations resulting from the above. Foreign exchange contracts
118
Notes to Consolidated Financial Statements(Continued)
December 31, 2008, 2007, and 2006 ($000s except share data)
include such commitments as foreign currency spot, forward, future and, to a much lesser extent, option contracts. The risks in these transactions arise from
the ability of the counterparties to perform under the terms of the contracts and the risk of trading in a volatile commodity. The Corporation actively monitors all transactions and positions against predetermined limits established on trades and
types of currency to ensure reasonable risk taking.
Matching
commitments to deliver foreign currencies with commitments to purchase foreign currencies minimizes the Corporations market risk from unfavorable movements in currency exchange rates.
At December 31, 2008 the Corporations foreign currency position
resulting from foreign exchange contracts by major currency was as follows (U.S. dollars):
|
|
|
|
|
|
|
|
|
Commitments
to Deliver
Foreign
Exchange
|
|
Commitments
to Purchase
Foreign
Exchange
|
Currency
|
|
|
|
|
|
|
Euro
|
|
$
|
325,492
|
|
$
|
325,666
|
Canadian Dollar
|
|
|
59,456
|
|
|
58,862
|
British Pound Sterling
|
|
|
53,382
|
|
|
53,236
|
Swiss Franc
|
|
|
46,747
|
|
|
46,833
|
Australian Dollar
|
|
|
31,823
|
|
|
31,755
|
Mexican Peso
|
|
|
6,659
|
|
|
6,678
|
Japanese Yen
|
|
|
6,261
|
|
|
6,255
|
South African Rand
|
|
|
2,446
|
|
|
2,440
|
All Other
|
|
|
910
|
|
|
943
|
|
|
|
|
|
|
|
Total
|
|
$
|
533,176
|
|
$
|
532,668
|
|
|
|
|
|
|
|
Average amount of contracts during 2008 to deliver/purchase foreign exchange
|
|
$
|
629,220
|
|
$
|
628,883
|
|
|
|
|
|
|
|
21. Derivative Financial
Instruments and Hedging Activities
Interest rate risk,
the exposure of the Corporations net interest income and net fair value of its assets and liabilities to adverse movements in interest rates, is a significant market risk exposure that can have a material effect on the Corporations
financial condition, results of operations and cash flows. The Corporation has established policies that neither earnings nor fair value at risk should exceed established guidelines and assesses these risks by modeling the impact of changes in
interest rates that may adversely impact expected future earnings and fair values.
The Corporation has strategies designed to confine these risks within the established limits and identify appropriate risk / reward trade-offs in the financial structure of its balance sheet. These strategies include
the use of derivative financial instruments to help achieve the desired balance sheet repricing structure while meeting the desired objectives of its customers.
The Corporation employs certain over-the-counter interest rate swaps that are the designated hedging instruments in fair value and cash flow hedges
that are used by the Corporation to manage its interest rate risk. These interest rate swaps are measured at fair value on a recurring basis based on significant other observable inputs and are categorized as Level 2. See Note 3Fair Value
Measurements in Notes to Consolidated Financial Statements for additional information.
119
Notes to Consolidated Financial Statements(Continued)
December 31, 2008, 2007, and 2006 ($000s except share data)
Trading Instruments and Other Free Standing Derivatives
The Corporation enters into various derivative
contracts which are designated as trading and other free standing derivative contracts. These 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.
Trading and other free standing derivatives are used primarily to focus on
providing derivative products to customers which enables them to manage their exposures to interest rate risk. The Corporations market risk from unfavorable movements in interest rates is generally economically hedged by concurrently entering
into offsetting derivative contracts. The offsetting derivative contracts generally have nearly identical notional values, terms and indices. The Corporation uses interest rate futures to economically hedge the exposure to interest rate risk arising
from the interest rate swap (designated as trading) entered into in conjunction with its auto securitization activities.
Interest rate lock commitments on residential mortgage loans intended to be held for sale are considered free standing derivative instruments. The option
to sell the mortgage loans at the time the commitments are made are also free standing derivative instruments. The change in fair value of these derivative instruments due to changes in interest rates tend to offset each other and act as economic
hedges. At December 31, 2008 and 2007, the estimated fair values of interest rate lock commitments on residential mortgage loans intended to be held for sale and related option to sell were insignificant.
The following tables summarize the balance sheet category and fair values of
trading derivatives not designated as hedging instruments under SFAS 133:
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
Notional
Amount
($ in
millions)
|
|
Balance Sheet Category
|
|
Fair
Value
($ in
millions)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
Interest Rate ContractsSwaps
|
|
$
|
4,593.2
|
|
Trading Assets
|
|
$
|
326.8
|
|
Interest Rate ContractsPurchased Interest Rate Caps
|
|
|
175.2
|
|
Trading Assets
|
|
|
1.4
|
|
Equity Derivative ContractsEquity-Indexed CDs
|
|
|
49.2
|
|
Trading Assets
|
|
|
3.3
|
|
Equity Derivative ContractsWarrants
|
|
|
0.1
|
|
Trading Assets
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
|
|
|
|
|
331.6
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
Interest Rate ContractsSwaps
|
|
$
|
4,395.8
|
|
Accrued Expenses and Other Liabilities
|
|
$
|
282.2
|
|
Interest Rate ContractsSold Interest Rate Caps
|
|
|
180.0
|
|
Accrued Expenses and Other Liabilities
|
|
|
1.4
|
|
Interest Rate ContractsInterest Rate Futures
|
|
|
1,637.0
|
|
Accrued Expenses and Other Liabilities
|
|
|
(0.1
|
)
|
Equity Derivative ContractsEquity-Indexed CDs
|
|
|
49.2
|
|
Accrued Expenses and Other Liabilities
|
|
|
3.3
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
|
|
|
|
|
286.8
|
|
|
|
|
|
|
|
|
|
|
|
Net positive fair value impact
|
|
|
|
|
|
|
$
|
44.8
|
|
|
|
|
|
|
|
|
|
|
|
120
Notes to Consolidated Financial Statements(Continued)
December 31, 2008, 2007, and 2006 ($000s except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
Notional
Amount
($ in millions)
|
|
Balance Sheet Category
|
|
Fair Value
($ in millions)
|
Assets:
|
|
|
|
|
|
|
|
|
Interest Rate ContractsSwaps
|
|
$
|
2,661.9
|
|
Trading Assets
|
|
$
|
71.0
|
Interest Rate ContractsPurchased Interest Rate Caps
|
|
|
56.9
|
|
Trading Assets
|
|
|
0.0
|
Equity Derivative ContractsWarrants
|
|
|
0.1
|
|
Trading Assets
|
|
|
0.5
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
|
|
|
|
|
71.5
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Interest Rate ContractsSwaps
|
|
$
|
2,245.7
|
|
Accrued Expenses and Other Liabilities
|
|
$
|
58.2
|
Interest Rate ContractsSold Interest Rate Caps
|
|
|
56.9
|
|
Accrued Expenses and Other Liabilities
|
|
|
0.0
|
Interest Rate ContractsInterest Rate Futures
|
|
|
2,399.0
|
|
Accrued Expenses and Other Liabilities
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
|
|
|
|
|
58.5
|
|
|
|
|
|
|
|
|
|
Net positive fair value impact
|
|
|
|
|
|
|
$
|
13.0
|
|
|
|
|
|
|
|
|
|
The following tables
summarize the income statement categories of the gain or (loss) recognized in income on trading derivatives not designated as hedging instruments under SFAS 133:
|
|
|
|
|
|
|
For the Year Ended December 31, 2008
|
|
Category of Gain or (Loss)
Recognized in Income on
Derivative
|
|
Amount of Gain or
(Loss) Recognized in
Income on Derivative
($ in
millions)
|
|
Interest Rate ContractsSwaps
|
|
Other IncomeOther
|
|
$
|
32.7
|
|
Interest Rate ContractsPurchased Interest Rate Caps
|
|
Other IncomeOther
|
|
|
0.0
|
|
Interest Rate ContractsSold Interest Rate Caps
|
|
Other IncomeOther
|
|
|
(0.0
|
)
|
Interest Rate ContractsInterest Rate Futures
|
|
Other IncomeOther
|
|
|
(10.1
|
)
|
Equity Derivative ContractsEquity-Indexed CDs
|
|
Other IncomeOther
|
|
|
0.0
|
|
Equity Derivative ContractsWarrants
|
|
Other IncomeOther
|
|
|
(0.4
|
)
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2007
|
|
Category of Gain or (Loss)
Recognized in Income on
Derivative
|
|
Amount of Gain or
(Loss) Recognized in
Income on Derivative
($ in
millions)
|
|
Interest Rate ContractsSwaps
|
|
Other IncomeOther
|
|
$
|
11.0
|
|
Interest Rate ContractsPurchased Interest Rate Caps
|
|
Other IncomeOther
|
|
|
0.0
|
|
Interest Rate ContractsSold Interest Rate Caps
|
|
Other IncomeOther
|
|
|
(0.0
|
)
|
Interest Rate ContractsQSPE
|
|
Other IncomeOther
|
|
|
(14.3
|
)
|
Interest Rate ContractsInterest Rate Futures
|
|
Other IncomeOther
|
|
|
(4.3
|
)
|
Equity Derivative ContractsWarrants
|
|
Other IncomeOther
|
|
|
(0.3
|
)
|
The Corporation uses
various derivative instruments that qualify as hedging relationships under SFAS 133. These instruments are designated as either fair value hedges or cash flow hedges. The Corporation recognizes these derivative instruments as either assets or
liabilities at fair value in the statement of financial position. The following provides further explanation of the hedging relationships.
Fair Value Hedges
The Corporation has fixed rate CDs and fixed rate long-term debt which expose the Corporation to variability in fair values due to changes in market
interest rates. To limit that variability, the Corporation has entered into received-fixed / pay floating interest rate swaps.
121
Notes to Consolidated Financial Statements(Continued)
December 31, 2008, 2007, and 2006 ($000s except share data)
The Corporation structures the interest rate swaps so that all
of the critical terms of the fixed rate CDs and fixed rate borrowings match the receive fixed leg of the interest rate swaps at inception of the hedging relationship. As a result, the Corporation expects the hedging relationship to be highly
effective in achieving offsetting changes in fair value due to changes in market interest rates both at inception and on an ongoing basis.
At December 31, 2008, no component of the derivative instruments gain or loss was excluded from the assessment of hedge effectiveness for
derivative financial instruments designated as fair value hedges.
During 2006, the Corporation terminated fair value hedges on certain long-term borrowings. The adjustment to the fair value of the hedged instrument of $4.7 million is being amortized as expense into earnings over the expected remaining
term of the borrowings using the effective interest method.
The impact from fair value hedges to total net interest income for the year ended December 31, 2008 was a positive $110.1 million. The impact to net interest income due to ineffectiveness was not material.
The impact from fair value hedges to total net interest income for the year
ended December 31, 2007 was a negative $2.4 million. The impact to net interest income due to ineffectiveness was a positive $0.3 million for the year ended December 31, 2007.
Cash Flow Hedges
The Corporation has variable rate investment securities, loans, deposits and borrowings which expose the Corporation to variability in interest payments
due to changes in interest rates. The Corporation believes it is prudent to limit the variability of a portion of its interest receipts and payments. To meet this objective, the Corporation enters into various types of derivative financial
instruments to manage fluctuations in cash flows resulting from interest rate risk. At December 31, 2008, these instruments consisted of interest rate swaps.
The Corporation invests in floating rate investment securities indexed to three-month LIBOR. As a result, the
Corporations interest receipts are exposed to variability in cash flows due to changes in three-month LIBOR.
In order to hedge the interest rate risk associated with the floating rate investment securities indexed to three-month LIBOR, the Corporation has entered
into receive fixed / pay LIBOR-based floating interest rate swaps designated as cash flow hedges against the LIBOR-based interest payments received.
The Corporation originates and holds floating rate commercial loans that reprice monthly on the first business day to one-month LIBOR. As a result, the
Corporations interest receipts are exposed to variability in cash flows due to changes in one-month LIBOR. In order to hedge the interest rate risk associated with the floating rate commercial loans indexed to one-month LIBOR, the Corporation
entered into receive fixed / pay LIBOR-based floating interest rate swaps designated as cash flow hedges against the first LIBOR-based interest payments received that, in the aggregate for each period, are interest payments on such principal amount
of its then existing LIBOR-indexed floating-rate commercial loans equal to the notional amount of the interest rate swaps outstanding. During 2008, the cash flow hedge matured.
The Corporation regularly issues floating rate institutional CDs indexed to three-month LIBOR. As a result, the
Corporations interest payments are exposed to variability in cash flows due to changes in three-month LIBOR.
In order to hedge the interest rate risk associated with floating rate institutional CDs, the Corporation has entered into pay fixed / receive LIBOR-based
floating interest rate swaps designated as cash flow hedges against the interest payments on the forecasted issuance of floating rate institutional CDs.
122
Notes to Consolidated Financial Statements(Continued)
December 31, 2008, 2007, and 2006 ($000s except share data)
For certain institutional CDs, hedge effectiveness is assessed
at inception and each quarter on an on-going basis using regression analysis that regresses daily observations of three-month LIBOR to itself with a five day mismatch on either side for potential reset date differences between the interest rate
swaps and the floating rate institutional CDs. The regression analysis is based on a rolling five years of daily observations. Ineffectiveness is measured using the hypothetical derivative method and is recorded as a component of interest expense on
deposits.
The Corporation structures the interest rate swaps
so that all of the critical terms of the LIBOR-based floating rate deposits and borrowings match the floating leg of the interest rate swaps at inception of the hedging relationship. As a result, the Corporation expects those hedging relationships
to be highly effective in achieving offsetting changes in cash flows due to changes in market interest rates both at inception and on an ongoing basis.
At December 31, 2008, no component of the derivative instruments gain or loss was excluded from the assessment of hedge effectiveness for
derivative financial instruments designated as cash flow hedges.
Changes in the fair value of the interest rate swaps designated as cash flow hedges are reported in accumulated other comprehensive income. These amounts are subsequently reclassified to interest income or interest expense as a yield
adjustment in the same period in which the related interest on the variable rate loans and short-term borrowings affects earnings. Ineffectiveness arising from differences between the critical terms of the hedging instrument and hedged item is
recorded in interest income or expense.
During 2007, $370
million of FHLB floating rate advances were retired. In conjunction with the retirement of debt, $370 million in notional value of receive floating / pay fixed interest rate swaps designated as cash flow hedges against the retired floating rate
advances were terminated. The unrealized gain in accumulated other comprehensive income aggregating $5.3 million ($3.4 million after tax) was recognized and is included in other noninterest income.
The impact to total net interest income from cash flow hedges, including
amortization of terminated cash flow hedges, for the year ended December 31, 2008 was a negative $38.7 million. The impact due to ineffectiveness was immaterial. The estimated reclassification from accumulated other comprehensive income in the
next twelve months is approximately $57.2 million.
The impact
to total net interest income from cash flow hedges, including amortization of terminated cash flow hedges, for the year ended December 31, 2007 was a positive $15.3 million. The impact due to ineffectiveness was immaterial.
For the year ended December 31, 2006, the total effect on net interest
income resulting from derivative financial instruments, was a positive $22.4 million including the amortization of terminated derivative financial instruments.
Credit risk arises from the potential failure of counterparties to perform in accordance with the terms of the contracts. The Corporation maintains
risk management policies that define parameters of acceptable market risk within the framework of its overall asset/liability management strategies and monitor and limit exposure to credit risk. The Corporation believes its credit and settlement
procedures serve to minimize its exposure to credit risk. Credit exposure resulting from derivative financial instruments is represented by their fair value amounts, increased by an estimate of potential adverse position exposure arising from
changes over time in interest rates, maturities and other relevant factors. At December 31, 2008, the estimated credit exposure arising from derivative financial instruments was approximately $116.2 million.
123
Notes to Consolidated Financial Statements(Continued)
December 31, 2008, 2007, and 2006 ($000s except share data)
The following tables summarize the balance sheet category and
fair values of derivatives designated as hedging instruments under SFAS 133:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
Derivatives
Designated as
Hedging Instruments
under SFAS 133
|
|
Derivative
Type
|
|
Hedged
Item
|
|
Notional
Amount
($ in
millions)
|
|
Balance Sheet
Category
|
|
Fair
Value
($ in
millions)
|
|
|
Weighted
Average
Remaining
Term
(Years)
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receive Fixed Rate Swaps
|
|
Cash Flow
|
|
Corporate Notes -AFS
|
|
$
|
57.4
|
|
Investment Securities
|
|
$
|
0.1
|
|
|
1.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
|
|
|
|
|
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receive Fixed Rate Swaps
|
|
Fair Value
|
|
Institutional CDs
|
|
$
|
25.0
|
|
Deposits
|
|
$
|
(2.5
|
)
|
|
27.4
|
Receive Fixed Rate Swaps
|
|
Fair Value
|
|
Callable CDs
|
|
|
5,970.2
|
|
Deposits
|
|
|
(100.4
|
)
|
|
13.5
|
Receive Fixed Rate Swaps
|
|
Fair Value
|
|
Brokered Bullet CDs
|
|
|
209.6
|
|
Deposits
|
|
|
(14.5
|
)
|
|
4.4
|
Pay Fixed Rate Swaps
|
|
Cash Flow
|
|
Institutional CDs
|
|
|
550.0
|
|
Deposits
|
|
|
27.7
|
|
|
1.3
|
Receive Fixed Rate Swaps
|
|
Fair Value
|
|
Fixed Rate Bank Notes
|
|
|
436.4
|
|
Long-Term Borrowings
|
|
|
(54.0
|
)
|
|
7.3
|
Pay Fixed Rate Swaps
|
|
Cash Flow
|
|
FHLB Advances
|
|
|
1,060.0
|
|
Long-Term Borrowings
|
|
|
98.4
|
|
|
3.0
|
Pay Fixed Rate Swaps
|
|
Cash Flow
|
|
Floating Rate Bank Notes
|
|
|
429.6
|
|
Long-Term Borrowings
|
|
|
30.7
|
|
|
2.3
|
Receive Fixed Rate Swaps
|
|
Fair Value
|
|
Medium Term notes
|
|
|
6.9
|
|
Long-Term Borrowings
|
|
|
(0.3
|
)
|
|
19.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
|
|
|
|
|
|
|
|
|
(14.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net positive fair value impact
|
|
|
|
|
|
|
|
|
|
|
$
|
15.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
124
Notes to Consolidated Financial Statements(Continued)
December 31, 2008, 2007, and 2006 ($000s except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
Derivatives
Designated as
Hedging Instruments
under SFAS 133
|
|
Derivative
Type
|
|
Hedged
Item
|
|
Notional
Amount
($ in
millions)
|
|
Balance Sheet
Category
|
|
Fair Value
($ in
millions)
|
|
|
Weighted
Average
Remaining
Term
(Years)
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receive Fixed Rate Swaps
|
|
Cash Flow
|
|
Variable Rate Loans
|
|
$
|
100.0
|
|
Loans and Leases
|
|
$
|
(0.7
|
)
|
|
0.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
|
|
|
|
|
|
|
|
|
(0.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receive Fixed Rate Swaps
|
|
Fair Value
|
|
Institutional CDs
|
|
$
|
50.0
|
|
Deposits
|
|
$
|
(0.3
|
)
|
|
28.5
|
Receive Fixed Rate Swaps
|
|
Fair Value
|
|
Callable CDs
|
|
|
520.7
|
|
Deposits
|
|
|
2.0
|
|
|
7.9
|
Pay Fixed Rate Swaps
|
|
Cash Flow
|
|
Institutional CDs
|
|
|
1,175.0
|
|
Deposits
|
|
|
18.0
|
|
|
1.3
|
Receive Fixed Rate Swaps
|
|
Fair Value
|
|
Fixed Rate Bank Notes
|
|
|
125.0
|
|
Long-Term Borrowings
|
|
|
1.9
|
|
|
8.5
|
Receive Fixed Rate Swaps
|
|
Fair Value
|
|
Fixed Rate Bank Notes
|
|
|
372.7
|
|
Long-Term Borrowings
|
|
|
(3.1
|
)
|
|
7.6
|
Pay Fixed Rate Swaps
|
|
Cash Flow
|
|
FHLB Advances
|
|
|
800.0
|
|
Long-Term Borrowings
|
|
|
38.3
|
|
|
4.5
|
Pay Fixed Rate Swaps
|
|
Cash Flow
|
|
Floating Rate Bank Notes
|
|
|
550.0
|
|
Long-Term Borrowings
|
|
|
13.0
|
|
|
1.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
|
|
|
|
|
|
|
|
|
69.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net negative fair value impact
|
|
|
|
|
|
|
|
|
|
|
$
|
(70.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The effect of Fair
Value Hedges on the Consolidated Statements of Income for the Year Ended December 31, 2008 ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
Designated as
Hedging Instruments
under SFAS 133
|
|
Category of Gain or (Loss)
Recognized
in Income on
Derivative
|
|
Amount of
Gain or (Loss)
Recognized in
Income on
Derivative
|
|
Category of Gain or (Loss)
Recognized
in Income
on Hedged
Item
|
|
Amount of
Gain or (Loss)
Recognized in
Income
on Hedged Item
|
|
Interest Rate Contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense:
|
|
|
|
|
Interest Expense:
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
Deposits:
|
|
|
|
|
Receive Fixed Rate Swaps
|
|
Institutional CDs
|
|
$
|
3.4
|
|
Institutional CDs
|
|
$
|
(2.2
|
)
|
Receive Fixed Rate Swaps
|
|
Callable CDs
|
|
|
204.8
|
|
Callable CDs
|
|
|
(102.5
|
)
|
Receive Fixed Rate Swaps
|
|
Brokered Bullet CDs
|
|
|
16.2
|
|
Brokered Bullet CDs
|
|
|
(14.5
|
)
|
|
|
|
|
|
|
|
Long-Term Borrowings:
|
|
|
|
|
Long-Term Borrowings:
|
|
|
|
|
Receive Fixed Rate Swaps
|
|
Fixed Rate Bank Notes
|
|
|
57.4
|
|
Fixed Rate Bank Notes
|
|
|
(52.7
|
)
|
Receive Fixed Rate Swaps
|
|
Medium Term Notes
|
|
|
0.3
|
|
Medium Term Notes
|
|
|
(0.5
|
)
|
Receive Fixed Rate Swaps
|
|
Other
|
|
|
|
|
Other
|
|
|
0.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
282.1
|
|
Total
|
|
$
|
(172.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
125
Notes to Consolidated Financial Statements(Continued)
December 31, 2008, 2007, and 2006 ($000s except share data)
The effect of Fair Value Hedges on the Consolidated Statements
of Income for the Year Ended December 31, 2007 ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
Designated as
Hedging Instruments
under SFAS 133
|
|
Category of Gain or (Loss)
Recognized
in Income on
Derivative
|
|
Amount of
Gain or
(Loss)
Recognized in
Income on
Derivative
|
|
|
Category of Gain or (Loss)
Recognized
in Income
on Hedged Item
|
|
Amount of
Gain or (Loss)
Recognized in
Income
on Hedged Item
|
|
Interest Rate Contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense:
|
|
|
|
|
|
Interest Expense:
|
|
|
|
|
|
|
Deposits
|
|
|
|
|
|
Deposits
|
|
|
|
|
Receive Fixed Rate Swaps
|
|
Institutional CDs
|
|
$
|
0.9
|
|
|
Institutional CDs
|
|
$
|
(0.3
|
)
|
Receive Fixed Rate Swaps
|
|
Callable CDs
|
|
|
(1.0
|
)
|
|
Callable CDs
|
|
|
2.1
|
|
|
|
Long-Term Borrowings
|
|
|
|
|
|
Long-Term Borrowings
|
|
|
|
|
Receive Fixed Rate Swaps
|
|
Fixed Rate Bank Notes
|
|
|
14.2
|
|
|
Fixed Rate Bank Notes
|
|
|
(18.5
|
)
|
Receive Fixed Rate Swaps
|
|
Medium-term Notes
|
|
|
|
|
|
Medium-term Notes
|
|
|
(0.2
|
)
|
Receive Fixed Rate Swaps
|
|
Other
|
|
|
|
|
|
Other
|
|
|
0.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
14.1
|
|
|
Total
|
|
$
|
(16.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The effect of Cash
Flow Hedges for the Year Ended December 31, 2008 ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives in SFAS 133 Cash Flow
Hedging Relationships
|
|
Amount of Gain or (Loss)
Recognized in OCI on
Derivative
(Effective Portion)
|
|
|
Category of
Gain or (Loss) Reclassified
from Accumulated OCI
into Income
(Effective
Portions)
|
|
Amount of
Gain or (Loss) Reclassified
from
Accumulated OCI
into Income
(Effective Portion)
|
|
|
Gross
|
|
|
Tax
|
|
|
Net
|
|
|
|
|
Gross
|
|
Tax
|
|
|
Net
|
Interest Rate Contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and Fee Income
|
|
|
|
|
|
|
|
|
|
|
Investment Securities Corporate Notes AFS
|
|
$
|
0.1
|
|
|
$
|
(0.0
|
)
|
|
$
|
0.1
|
|
|
Investment SecuritiesCorporate Notes AFS
|
|
$
|
0.0
|
|
$
|
(0.0
|
)
|
|
$
|
0.0
|
Loans and LeasesVariable Rate Loans
|
|
|
0.4
|
|
|
|
(0.1
|
)
|
|
|
0.3
|
|
|
Loans and LeasesVariable Rate Loans
|
|
|
0.2
|
|
|
(0.1
|
)
|
|
|
0.1
|
|
|
|
|
|
|
|
|
Interest Rate Contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
Institutional CDs
|
|
|
(23.2
|
)
|
|
|
8.1
|
|
|
|
(15.1
|
)
|
|
Institutional CDs
|
|
|
13.5
|
|
|
(4.7
|
)
|
|
|
8.8
|
Long-term Borrowings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term Borrowings:
|
|
|
|
|
|
|
|
|
|
|
FHLB Advances
|
|
|
(75.8
|
)
|
|
|
26.5
|
|
|
|
(49.3
|
)
|
|
FHLB Advances
|
|
|
15.7
|
|
|
(5.5
|
)
|
|
|
10.2
|
Floating Rate Bank Notes
|
|
|
(26.0
|
)
|
|
|
9.1
|
|
|
|
(16.9
|
)
|
|
Floating Rate Bank Notes
|
|
|
8.4
|
|
|
(2.9
|
)
|
|
|
5.5
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (1)
|
|
|
0.8
|
|
|
(0.3
|
)
|
|
|
0.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(124.5
|
)
|
|
$
|
43.6
|
|
|
$
|
(80.9
|
)
|
|
|
|
$
|
38.6
|
|
$
|
(13.5
|
)
|
|
$
|
25.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Represents amortization for the year ended December 31, 2008 from the termination of swaps.
|
The gain recognized in income representing the ineffective portion of the hedging relationships and excluded from the
assessment of hedge effectiveness was not material for the year ended December 31, 2008.
126
Notes to Consolidated Financial Statements(Continued)
December 31, 2008, 2007, and 2006 ($000s except share data)
The effect of Cash Flow Hedges for the Year Ended
December 31, 2007 ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives in SFAS 133 Cash Flow
Hedging Relationships
|
|
Amount of Gain or (Loss)
Recognized in OCI on
Derivative
(Effective Portion)
|
|
|
Category of
Gain or (Loss) Reclassified
from Accumulated OCI
into Income
(Effective Portions)
|
|
Amount of
Gain or (Loss)
Reclassified
from Accumulated OCI
into Income
(Effective Portion)
|
|
|
|
Gross
|
|
|
Tax
|
|
|
Net
|
|
|
|
|
Gross
|
|
|
Tax
|
|
|
Net
|
|
Interest Rate Contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and Fee Income
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans and LeasesVariable Rate Loans
|
|
$
|
0.0
|
|
|
$
|
(0.0
|
)
|
|
$
|
0.0
|
|
|
Loans and LeasesVariable Rate Loans
|
|
$
|
2.1
|
|
|
$
|
(0.7
|
)
|
|
$
|
1.4
|
|
Interest Rate Contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
Institutional CDs
|
|
|
(12.1
|
)
|
|
|
4.2
|
|
|
|
(7.9
|
)
|
|
Institutional CDs
|
|
|
(6.9
|
)
|
|
|
2.4
|
|
|
|
(4.5
|
)
|
Brokered Money Market
|
|
|
0.1
|
|
|
|
(0.0
|
)
|
|
|
0.1
|
|
|
Brokered Money Market
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term Borrowings
|
|
|
(0.2
|
)
|
|
|
0.1
|
|
|
|
(0.1
|
)
|
|
Short-term Borrowings
|
|
|
0.3
|
|
|
|
(0.1
|
)
|
|
|
0.2
|
|
Long-term Borrowings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term Borrowings:
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLB Advances
|
|
|
(35.7
|
)
|
|
|
12.5
|
|
|
|
(23.2
|
)
|
|
FHLB Advances
|
|
|
(8.8
|
)
|
|
|
3.1
|
|
|
|
(5.7
|
)
|
Floating Rate Bank Notes
|
|
|
(8.3
|
)
|
|
|
2.9
|
|
|
|
(5.4
|
)
|
|
Floating Rate Bank Notes
|
|
|
(2.5
|
)
|
|
|
0.8
|
|
|
|
(1.7
|
)
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (1)
|
|
|
0.6
|
|
|
|
(0.2
|
)
|
|
|
0.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(56.2
|
)
|
|
$
|
19.7
|
|
|
$
|
(36.5
|
)
|
|
|
|
$
|
(15.2
|
)
|
|
$
|
5.3
|
|
|
$
|
(9.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Category of Gain or (Loss)
Recognized in Income on
Derivative
(Ineffectiveness Portion and
Amount Excluded from
Effectiveness Testing)
|
|
Amount of Gain or (Loss)
Recognized in Income on
Derivative (Ineffectiveness
Portion and Amount
Excluded
from
Effectiveness Testing) (2)
|
|
|
|
|
|
Gross
|
|
|
Tax
|
|
Net
|
|
|
|
Interest Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term Borrowings
|
|
$
|
(0.1
|
)
|
|
$
|
0.0
|
|
$
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(0.1
|
)
|
|
$
|
0.0
|
|
$
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Represents amortization for the year ended December 31, 2007 from the termination of swaps.
|
(2)
|
|
For the year ended December 31, 2007, the gain or (loss) recognized in income represents the ineffective portion of the hedging relationships and excluded from the assessment
of hedge effectiveness.
|
22. Fair Value of Financial
Instruments
The book values and estimated fair values for
on and off-balance sheet financial instruments as of December 31, 2008 and 2007 are presented in the following table. Derivative financial instruments designated as hedging instruments are included in the book values and fair values presented
for the related hedged items. Derivative financial instruments designated as trading and other free standing derivatives are included in Trading assets.
127
Notes to Consolidated Financial Statements(Continued)
December 31, 2008, 2007, and 2006 ($000s except share data)
Balance Sheet Financial Instruments ($ in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
2007
|
|
|
Book Value
|
|
Fair Value
|
|
Book Value
|
|
Fair Value
|
Financial Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and short term investments
|
|
$
|
1,082.1
|
|
$
|
1,082.1
|
|
$
|
1,830.8
|
|
$
|
1,830.8
|
Trading assets
|
|
|
518.4
|
|
|
518.4
|
|
|
124.6
|
|
|
124.6
|
Investment securities available for sale
|
|
|
7,430.6
|
|
|
7,430.6
|
|
|
7,442.9
|
|
|
7,442.9
|
Investment securities held to maturity
|
|
|
238.0
|
|
|
243.4
|
|
|
374.9
|
|
|
383.2
|
Net loans and leases
|
|
|
48,782.4
|
|
|
45,224.8
|
|
|
45,800.1
|
|
|
46,456.9
|
Interest receivable
|
|
|
219.3
|
|
|
219.3
|
|
|
267.8
|
|
|
267.8
|
|
|
|
|
|
Financial Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
41,023.1
|
|
|
41,537.2
|
|
|
35,191.4
|
|
|
35,244.7
|
Short-term borrowings
|
|
|
4,058.0
|
|
|
4,059.0
|
|
|
6,811.0
|
|
|
6,811.0
|
Long-term borrowings
|
|
|
9,613.7
|
|
|
9,332.4
|
|
|
9,872.8
|
|
|
9,995.8
|
Interest payable
|
|
|
240.1
|
|
|
240.1
|
|
|
253.1
|
|
|
253.1
|
Where readily
available, quoted market prices are utilized by the Corporation. If quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. These techniques are significantly affected by the
assumptions used, including the discount rate and estimates of future cash flows. The calculated fair value estimates, therefore, cannot be substantiated by comparison to independent markets and, in many cases, could not be realized upon immediate
settlement of the instrument. The current reporting requirements exclude certain financial instruments and all nonfinancial assets and liabilities from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not
represent the underlying value of the entire Corporation.
The
following methods and assumptions are used in estimating the fair value for financial instruments.
Cash and short-term investments
The carrying amounts reported for cash and short-term investments approximate the fair values for those assets.
Trading assets and investment securities
Fair value is based on market prices where available. Estimated fair values
for residual interests in the form of interest-only strips from automobile loan securitizations are based on discounted cash flow analysis. The fair value of trading assets and investment securities are categorized as Level 1, Level 2 and Level 3,
based on the inputs to the valuations. See Note 3Fair Value Measurements in Notes to Consolidated Financial Statements for additional information.
Net loans and leases
Loan and lease balances are assigned fair values based on a discounted cash flow analysis. The discount rate is based on the LIBOR swap curve, with rate
adjustments for credit quality, cost and profit factors. Net loans and leases include loans held for sale. At December 31, 2008, the fair value of net loans and leases are considered Level 2 and Level 3 in the Fair Value Hierarchy.
Deposits
The fair value for demand deposits or any interest bearing deposits with no
fixed maturity date is considered to approximate the carrying value. Time deposits with defined maturity dates are considered to have a fair value which approximates the book value if the maturity date was within three months of December 31.
The remaining time deposits are assigned fair values based on a discounted cash flow analysis using discount rates that approximate interest rates currently being offered on time deposits with comparable maturities. At December 31, 2008, the
fair value of deposits are considered Level 2 in the Fair Value Hierarchy.
128
Notes to Consolidated Financial Statements(Continued)
December 31, 2008, 2007, and 2006 ($000s except share data)
Borrowings
Short-term borrowings are carried at cost that approximates fair value.
Long-term debt is generally valued using a discounted cash flow analysis with a discount rate based on current incremental borrowing rates for similar types of arrangements or, if not readily available, based on a build up approach similar to that
used for loans and deposits. The fair value of borrowings are considered Level 2 in the Fair Value Hierarchy. Long-term borrowings include their related current maturities.
Off-Balance Sheet Financial Instruments ($ in millions)
Fair values of off-balance sheet financial instruments have been estimated based on the equivalent fees, net of expenses,
that would be charged for similar contracts and customers at December 31:
|
|
|
|
|
|
|
|
|
2008
|
|
2007
|
Loan commitments
|
|
$
|
14.2
|
|
$
|
11.9
|
Commercial letters of credit
|
|
|
0.3
|
|
|
0.6
|
Credit support agreements
|
|
|
5.9
|
|
|
|
Standby letters of credit
|
|
|
12.9
|
|
|
9.7
|
See Note
19Financial Instruments with Off-Balance Sheet Risk in Notes to Consolidated Financial Statements for additional information.
23. Business Segments
The Corporations operating segments are presented based on its management structure and management accounting practices. The structure and practices
are specific to the Corporation; therefore, the financial results of the Corporations business segments are not necessarily comparable with similar information for other financial institutions.
During the second quarter of 2008, management consolidated certain lending
activities and transferred the assets and the related goodwill from the Community Banking segment to the National Consumer Banking Division reporting unit, which is a component of Others. Prior period segment information has been adjusted to reflect
the transfer.
In conjunction with the Separation, the
Corporation reorganized its operating segments. The corresponding information for the prior periods has been adjusted.
The Corporation manages interest rate risk centrally at the corporate level by employing a funds transfer pricing (FTP) methodology. This
methodology insulates the business segments from interest rate volatility, enabling them to focus on servicing customers. The FTP system assigns charge rates and credit rates to classes of assets and liabilities, respectively, based on expected
duration. The net impact of the FTP methodology is included in Treasury. Net interest income is presented on a fully taxable equivalent basis.
The financial results of the business segments include allocations for shared services and corporate expenses. Even with these allocations, the financial
results are not necessarily indicative of the business segments financial condition and results of operations as if they were to exist as independent entities. Additionally, the business segments form synergies by taking advantage of
cross-sell opportunities and when funding operations by accessing the capital markets as a collective unit. The financial information for each segment is reported on the basis used internally by the Corporations management to evaluate
performance and allocate resources. The allocation has been consistently applied for all period presented. Revenues from affiliated transactions are typically charged at rates available to and transacted with unaffiliated customers. The accounting
policies of the Corporations segments are generally the same as those described in Note 1Basis of Presentation and Summary of Significant Accounting Policies in Notes to Consolidated Financial Statements.
129
Notes to Consolidated Financial Statements(Continued)
December 31, 2008, 2007, and 2006 ($000s except share data)
Based on the way the Corporation organizes its segments, the
Corporation has determined that it has four reportable segments, which include Commercial Banking, Community Banking, Wealth Management and Treasury.
Commercial Banking
The Commercial Banking segment provides financial expertise in Corporate, Commercial, Correspondent and Commercial Real Estate Banking. Commercial Banking
provides a complete line of commercial, corporate and real estate banking products and services, including: traditional commercial loans and lines of credit, letters of credit, asset-based lending, equipment financing, mezzanine financing, global
trade services, treasury management and other financial services to middle market, large corporate and public sector clients. Commercial banking also supports the commercial real estate and correspondent market with products and services including
secured and unsecured lines of credit, letters of credit, construction loans for commercial and residential development and land acquisition and development loans.
Community Banking
Community Banking provides consumer and business banking products and services to customers primarily within M&Is footprint states. Banking
services are provided through branches located throughout Wisconsin, Arizona, the Minneapolis, Minnesota, Kansas City, Missouri and St. Louis, Missouri metropolitan areas, and Orlando, Florida metropolitan areas, Duluth Minnesota, Belleville,
Illinois, Las Vegas, Nevada and Floridas west coast. Consumer products include loan and deposit products: mortgage, home equity loans and lines, credit cards, student loans, personal lines and term loans, demand deposit accounts, interest
bearing transaction accounts and time deposits. Business banking products include secured and unsecured lines and term loans for working capital, inventory and general corporate use, commercial real estate construction loans, agricultural loans,
demand deposit accounts, interest bearing transaction accounts and time deposits.
Wealth Management
The Wealth Management
segment, which includes M&Is trust, brokerage and private banking business, provides integrated asset management, trust and banking services through three business lines: Investment Management, Personal Services and Institutional Services.
Investment Management is a multi-dimensional asset management service with a broad range of strategies, styles and product delivery options such as separately managed equity and fixed income strategies, managed asset allocation strategies,
alternative investments and The Marshall Funds, M&Is family of mutual funds. Personal Services includes Cedar Street Advisors, Personal Wealth Management and M&I Financial Advisors. Cedar Street Advisors manages the complex financial
affairs of ultra-high net worth individuals and their families. Personal Wealth Management services assemble and implement an all-inclusive financial roadmap for high net worth individuals and families, providing for their private banking (credit
and deposits), investment, estate and tax planning needs. M&I Financial Advisors uses a formulized financial planning process based on an individuals resources, goals, and risk tolerance to develop a personalized financial plan, and then
offers a full array of brokerage and insurance solutions to meet that plan. The Institutional Services business includes Retirement Plan Services, Taft-Hartley Services, Not-for-Profit Services, North Star Deferred Exchange and Trust Operations
Outsourcing.
Treasury
Treasury provides management of interest rate risk, capital, liquidity,
funding and investments to the Corporation and all of its subsidiary banks.
Others
The Other segment includes a Capital
Markets and a National Consumer Banking Division. The Capital Markets Division provides a variety of products and services designed to address its customers risk management and investment needs. These services include derivative solutions and
investment services, currency conversion and foreign
130
Notes to Consolidated Financial Statements(Continued)
December 31, 2008, 2007, and 2006 ($000s except share data)
exchange services and risk management. These services are provided primarily to corporate, business banking and financial institution clients. The National
Consumer Banking Division provides wholesale home equity consumer lending, indirect automobile financing, and affinity banking services.
Total Revenues by type in Others consist of the following ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
2007
|
|
2006
|
Capital Markets Division
|
|
$
|
54.8
|
|
$
|
37.5
|
|
$
|
35.8
|
National Consumer Banking Division
|
|
|
134.5
|
|
|
87.1
|
|
|
125.2
|
Administrative & Other
|
|
|
66.7
|
|
|
103.0
|
|
|
38.7
|
Other
|
|
|
267.2
|
|
|
240.6
|
|
|
210.8
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
523.2
|
|
$
|
468.2
|
|
$
|
410.5
|
|
|
|
|
|
|
|
|
|
|
Results of operations
and identifiable assets by segment for each of the three years ended December 31 are:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2008 ($ in millions)
|
|
|
|
Commercial
Banking
|
|
|
Community
Banking
|
|
|
Wealth
Management
|
|
Treasury
|
|
Others
|
|
|
Corporate
Overhead
|
|
|
Eliminations,
Reclassifi-
cations &
Adjustments
|
|
|
Consolidated
|
|
Net interest income
|
|
$
|
776.6
|
|
|
$
|
792.8
|
|
|
$
|
61.9
|
|
$
|
59.9
|
|
$
|
170.1
|
|
|
$
|
(53.4
|
)
|
|
$
|
(27.2
|
)
|
|
$
|
1,780.7
|
|
Provision for loan and lease losses
|
|
|
1,519.1
|
|
|
|
316.9
|
|
|
|
23.5
|
|
|
|
|
|
178.2
|
|
|
|
|
|
|
|
|
|
|
|
2,037.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision for loan and lease losses
|
|
|
(742.5
|
)
|
|
|
475.9
|
|
|
|
38.4
|
|
|
59.9
|
|
|
(8.1
|
)
|
|
|
(53.4
|
)
|
|
|
(27.2
|
)
|
|
|
(257.0
|
)
|
Other income
|
|
|
105.1
|
|
|
|
183.3
|
|
|
|
291.3
|
|
|
48.9
|
|
|
353.1
|
|
|
|
102.8
|
|
|
|
(336.4
|
)
|
|
|
748.1
|
|
Goodwill impairment
|
|
|
925.6
|
|
|
|
609.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,535.1
|
|
All other expense
|
|
|
283.3
|
|
|
|
693.1
|
|
|
|
293.4
|
|
|
20.9
|
|
|
398.4
|
|
|
|
106.3
|
|
|
|
(336.4
|
)
|
|
|
1,459.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
(1,846.3
|
)
|
|
|
(643.4
|
)
|
|
|
36.3
|
|
|
87.9
|
|
|
(53.4
|
)
|
|
|
(56.9
|
)
|
|
|
(27.2
|
)
|
|
|
(2,503.0
|
)
|
Income tax expense (benefit)
|
|
|
(381.3
|
)
|
|
|
(47.8
|
)
|
|
|
13.9
|
|
|
35.2
|
|
|
(34.7
|
)
|
|
|
(17.6
|
)
|
|
|
(27.2
|
)
|
|
|
(459.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment income
|
|
$
|
(1,465.0
|
)
|
|
$
|
(595.6
|
)
|
|
$
|
22.4
|
|
$
|
52.7
|
|
$
|
(18.7
|
)
|
|
$
|
(39.3
|
)
|
|
$
|
|
|
|
$
|
(2,043.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable assets
|
|
$
|
25,771.3
|
|
|
$
|
18,805.6
|
|
|
$
|
1,688.3
|
|
$
|
8,674.3
|
|
$
|
7,773.8
|
|
|
$
|
2,289.0
|
|
|
$
|
(2,665.9
|
)
|
|
$
|
62,336.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
131
Notes to Consolidated Financial Statements(Continued)
December 31, 2008, 2007, and 2006 ($000s except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2007 ($ in millions)
|
|
|
Commercial
Banking
|
|
Community
Banking
|
|
Wealth
Management
|
|
Treasury
|
|
|
Others
|
|
|
Corporate
Overhead
|
|
|
Eliminations,
Reclassifi-
cations &
Adjustments
|
|
|
Consolidated
|
Net interest income
|
|
$
|
685.4
|
|
$
|
805.5
|
|
$
|
52.1
|
|
$
|
15.2
|
|
|
$
|
119.2
|
|
|
$
|
(33.7
|
)
|
|
$
|
(27.5
|
)
|
|
$
|
1,616.2
|
Provision for loan and lease losses
|
|
|
237.6
|
|
|
48.6
|
|
|
3.8
|
|
|
|
|
|
|
29.8
|
|
|
|
|
|
|
|
|
|
|
|
319.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision for loan and lease losses
|
|
|
447.8
|
|
|
756.9
|
|
|
48.3
|
|
|
15.2
|
|
|
|
89.4
|
|
|
|
(33.7
|
)
|
|
|
(27.5
|
)
|
|
|
1,296.4
|
Other income
|
|
|
87.4
|
|
|
149.6
|
|
|
269.7
|
|
|
46.4
|
|
|
|
349.0
|
|
|
|
131.3
|
|
|
|
(304.3
|
)
|
|
|
729.1
|
Other expense
|
|
|
196.9
|
|
|
579.3
|
|
|
221.8
|
|
|
87.6
|
|
|
|
361.8
|
|
|
|
171.8
|
|
|
|
(304.3
|
)
|
|
|
1,314.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
338.3
|
|
|
327.2
|
|
|
96.2
|
|
|
(26.0
|
)
|
|
|
76.6
|
|
|
|
(74.2
|
)
|
|
|
(27.5
|
)
|
|
|
710.6
|
Income tax expense (benefit)
|
|
|
135.3
|
|
|
130.9
|
|
|
35.6
|
|
|
(10.4
|
)
|
|
|
(20.6
|
)
|
|
|
(29.6
|
)
|
|
|
(27.5
|
)
|
|
|
213.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment income
|
|
$
|
203.0
|
|
$
|
196.3
|
|
$
|
60.6
|
|
$
|
(15.6
|
)
|
|
$
|
97.2
|
|
|
$
|
(44.6
|
)
|
|
$
|
|
|
|
$
|
496.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable assets
|
|
$
|
25,403.7
|
|
$
|
19,630.5
|
|
$
|
1,551.3
|
|
$
|
8,918.0
|
|
|
$
|
4,866.7
|
|
|
$
|
3,439.8
|
|
|
$
|
(3,961.4
|
)
|
|
$
|
59,848.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2006 ($ in millions)
|
|
|
Commercial
Banking
|
|
Community
Banking
|
|
Wealth
Management
|
|
Treasury
|
|
Others
|
|
|
Corporate
Overhead
|
|
|
Eliminations,
Reclassifi-
cations &
Adjustments
|
|
|
Consolidated
|
Net interest income
|
|
$
|
625.1
|
|
$
|
783.6
|
|
$
|
43.0
|
|
$
|
1.9
|
|
$
|
112.6
|
|
|
$
|
(29.7
|
)
|
|
$
|
(28.9
|
)
|
|
$
|
1,507.6
|
Provision for loan and lease losses
|
|
|
38.5
|
|
|
27.8
|
|
|
2.7
|
|
|
|
|
|
(18.4
|
)
|
|
|
|
|
|
|
|
|
|
|
50.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision for loan and lease losses
|
|
|
586.6
|
|
|
755.8
|
|
|
40.3
|
|
|
1.9
|
|
|
131.0
|
|
|
|
(29.7
|
)
|
|
|
(28.9
|
)
|
|
|
1,457.0
|
Other income
|
|
|
74.0
|
|
|
131.6
|
|
|
232.2
|
|
|
17.4
|
|
|
297.9
|
|
|
|
111.6
|
|
|
|
(283.0
|
)
|
|
|
581.7
|
Other expense
|
|
|
167.5
|
|
|
530.3
|
|
|
191.9
|
|
|
12.1
|
|
|
335.9
|
|
|
|
110.4
|
|
|
|
(264.5
|
)
|
|
|
1,083.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
493.1
|
|
|
357.1
|
|
|
80.6
|
|
|
7.2
|
|
|
93.0
|
|
|
|
(28.5
|
)
|
|
|
(47.4
|
)
|
|
|
955.1
|
Income tax expense (benefit)
|
|
|
197.2
|
|
|
142.8
|
|
|
32.4
|
|
|
2.9
|
|
|
(16.7
|
)
|
|
|
(15.8
|
)
|
|
|
(35.4
|
)
|
|
|
307.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment income
|
|
$
|
295.9
|
|
$
|
214.3
|
|
$
|
48.2
|
|
$
|
4.3
|
|
$
|
109.7
|
|
|
$
|
(12.7
|
)
|
|
$
|
(12.0
|
)
|
|
$
|
647.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable assets (a)
|
|
$
|
21,676.7
|
|
$
|
17,913.3
|
|
$
|
1,174.9
|
|
$
|
7,923.7
|
|
$
|
5,556.4
|
|
|
$
|
781.9
|
|
|
$
|
(114.6
|
)
|
|
$
|
54,912.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
Excludes assets of discontinued operations.
|
132
Notes to Consolidated Financial Statements(Continued)
December 31, 2008, 2007, and 2006 ($000s except share data)
24. Guarantees
Letters of Credit
Standby letters of credit are contingent commitments issued by the
Corporation to support the obligations of a customer to a third party and to support public and private financing, and other financial or performance obligations of customers. Standby letters of credit have maturities that generally reflect the
maturities of the underlying obligations. The credit risk involved in issuing standby letters of credit is the same as that involved in extending loans to customers. If deemed necessary, the Corporation holds various forms of collateral to support
the standby letters of credit. The gross amount of standby letters of credit issued at December 31, 2008 was $3.1 billion. Of the amount outstanding at December 31, 2008, standby letters of credit conveyed to others in the form of
participations amounted to $130.5 million. Since many of the standby letters of credit are expected to expire without being drawn upon, the amounts outstanding do not necessarily represent future cash requirements. At December 31, 2008, the
estimated fair value associated with letters of credit amounted to $12.9 million.
Trust Preferred Securities
In conjunction with the acquisitions of Gold Banc, Trustcorp, Excel and First Indiana, the Corporation acquired all of the common interests in the trusts that issued cumulative preferred capital securities which are
supported by junior subordinated deferrable interest debentures. At December 31, 2008, the principal amounts outstanding associated with these trusts were $16.0 million, $30.0 million, $38.0 million and $15.0 million. The full guarantees were
assumed by M&I LLC. See Note 14Long Term Borrowings in Notes to Consolidated Financial Statements for further information.
Securities Lending
As part of securities custody activities and at the direction of its clients, the Corporations Wealth Management segment lends securities owned by
its clients to borrowers who have been evaluated for credit risk in a manner similar to that employed in making lending decisions. In connection with these activities, M&I Trust has issued an indemnification against loss resulting from the
default by a borrower under the master securities loan agreement due to the failure of the borrower to return loaned securities when due. The borrowing party is required to fully collateralize securities received with cash or marketable securities.
As securities are loaned, collateral is maintained at a minimum of 100% of the fair value of the securities plus accrued interest and the collateral is revalued on a daily basis. The amount of securities loaned subject to indemnification was $8.2
billion at December 31, 2008 and $11.2 billion at December 31, 2007. Because of the requirement to fully collateralize securities borrowed, management believes that the exposure to credit loss from this activity is remote and there are no
liabilities reflected on the Consolidated Balance Sheets at December 31, 2008 and December 31, 2007, related to these indemnifications.
During 2008, Lehman Brothers declared bankruptcy and failed to return loaned securities when due. As a result of the indemnification against loss
resulting from the default by Lehman Brothers under the master securities loan agreement, M&I Trust recognized a loss for the difference between the amount paid to acquire the replacement securities and the collateral available to purchase the
replacement securities. The collateral shortfall was due to an unexpected volatile market condition that existed when the replacement securities were acquired. The loss amounted to $8.4 million and is reported in the line Other within Other Expense
in the Consolidated Statements of Income.
Credit Support
Agreements
Certain entities within the Wealth
Management segment are the investment advisor and trustee of the M&I Employee Benefit Stable Principal Fund (SPF). The SPF periodically participates in securities lending activities. Although not obligated to do so, during 2008,
M&I Trust and M&I Corporation entered into capital support agreements with SPF in order to provide stability to SPF and investors in SPF due to volatile market conditions. Under the terms of the agreements, M&I Trust would be required to
contribute capital to SPF, not to exceed $30.0 million in the aggregate and for no consideration, should certain asset loss events occur. The Corporation would be required to contribute
133
Notes to Consolidated Financial Statements(Continued)
December 31, 2008, 2007, and 2006 ($000s except share data)
capital, should certain asset loss events occur after the M&I Trusts $30.0 million capital contribution, not to exceed $60.0 million in the
aggregate and for no consideration. The agreements expire on March 31, 2009 and contain terms that provide for three month renewals with all of the significant terms, including maximum contribution limits, remaining unchanged. At
December 31, 2008, the estimated fair value of the contingent liability under the agreements that is recorded within other liabilities in the consolidated balance sheet amounted to $5.9 million. As of December 31, 2008, no contributions
have been made under the agreements.
Visa Litigation
As a result of the Corporations banking
subsidiaries participation in the Visa USA network, principally related to debit and credit cards, the Corporation owns 0.406831 % of Visa, Inc. (Visa) for which there is no investment or carrying value recorded.
In preparation for an initial public offering (the IPO) of its
common stock, Visas by-laws were modified in 2007 to provide for indemnification of Visa by its members for any ultimate losses related to certain existing litigation (covered litigation).
In general terms, the covered litigation consists of the following:
American Express Anti-Trust Litigation:
This
litigation was recently settled for $2.1 billion.
Discover Litigation:
The Discover litigation is a parallel proceeding to the American Express litigation. Visa initially disclosed that it had recorded a liability of $650 million.
Attridge Litigation:
Attridge is a purported consumer class
action filed against Visa. The complaint alleges unfair competition. Visa has not made any disclosures about its potential loss exposure.
Interchange Litigation:
Included in the Interchange litigation are two lawsuits. The Interchange lawsuits allege violations of the antitrust
rules by Visa in connection with the interchange fee charged to merchants by issuing banks in connection with the processing of Visa credit card transactions. Visa has not made any disclosures about its potential loss exposure.
In 2007, the Corporation accrued $25.8 million as its estimate of the fair
value of its indemnification obligation to Visa. The amount accrued was based in part on the announced settled litigation with American Express and Visas disclosure of its estimate of probable loss for the Discover litigation. However, the
other litigation matters are only in the early stages of discovery and it is impossible to determine the probable loss on those matters at this time. The Corporation is not a named defendant in any of Visas litigation matters, and has no
access to information about the matters other than as disclosed by Visa. For these reasons, the estimated fair value of the amount accrued on the other litigation matters involved a significant amount of judgment and management cannot estimate the
Corporations maximum obligation. In conjunction with the January 2, 2008 acquisition of First Indiana, the Corporation assumed First Indianas indemnification obligation to Visa with an estimated fair value of $0.5 million.
During the first quarter of 2008, Visa completed the IPO. In
conjunction with the IPO, Visa established a $3.0 billion escrow for the litigation matters subject to the indemnification from the proceeds of the IPO. As a result of the funded escrow, the Corporation reversed $12.2 million of the litigation
accruals that were originally recorded and assumed based on the Corporations membership interests in Visa and the funded escrow. In addition, Visa redeemed 38.7% of the Visa Class B common stock owned by the Corporation for cash in the amount
of $26.9 million. The Corporations remaining Visa Class B common stock was placed in escrow for a period of three years, and it is expected that any indemnification obligations in excess of the funded escrow will be funded by the escrowed
stock.
During 2008, Visa announced that it had agreed to
settle the litigation with Discover. Visa announced that $1.7425 billion of the settlement would be funded from the escrow created under Visas retrospective responsibility
134
Notes to Consolidated Financial Statements(Continued)
December 31, 2008, 2007, and 2006 ($000s except share data)
plan. Prior to the establishment of the $3.0 billion escrow from the proceeds of the IPO for the litigation matters subject to the indemnification, Visa
disclosed that it had recorded a liability of $0.650 billion for the Discover litigation. During the fourth quarter of 2008, Visa issued escrowed common stock to offset the additional reserve requirements.
The Corporations 998,826 shares of Visa Class B common stock will be
convertible into Visa Class A common stock based on a conversion factor that is currently 0.6296. However, the ultimate conversion factor is dependent on the resolution of the pending litigation.
The Corporation expects the ultimate value of its membership interests to
exceed its indemnification obligations. However, additional accruals may be necessary depending on the resolution of the pending Visa litigation.
25. Other Contingent Liabilities
In the normal course of business, the Corporation and its subsidiaries are routinely defendants in or parties to a number of pending and threatened legal
actions, including, but not limited to, actions brought on behalf of various classes of claimants, employment matters, and challenges from tax authorities regarding the amount of taxes due. In certain of these actions and proceedings, claims for
monetary damages or adjustments to recorded tax liabilities are asserted. In view of the inherent difficulty of predicting the outcome of such matters, particularly matters that will be decided by a jury and actions that seek large damages based on
novel and complex damage and liability legal theories or that involve a large number of parties, the Corporation cannot state with confidence the eventual outcome of these matters or the timing of their ultimate resolution, or estimate the possible
loss or range of loss associated with them; however, based on current knowledge and after consultation with legal counsel, management does not believe that judgments or settlements in excess of amounts already reserved, if any, arising from pending
or threatened legal actions, employment matters, or challenges from tax authorities, either individually or in the aggregate, would have a material adverse effect on the consolidated financial position or liquidity of the Corporation, although they
could have a material effect on operating results for a particular period.
135
Notes to Consolidated Financial Statements(Continued)
December 31, 2008, 2007, and 2006 ($000s except share data)
26. Condensed Financial InformationParent Corporation Only
In conjunction with the Separation on November 1,
2007, Marshall & Ilsley Corporation (Accounting Predecessor to New Marshall & Ilsley Corporation) became M&I LLC, a wholly-owned subsidiary of New Marshall & Ilsley, which became Marshall & Ilsley Corporation.
The Condensed Balance Sheets, Condensed Statements of Income and Condensed Statements of Cash Flows as of and for the years ended December 31, 2008 and 2007 present the Parent Corporation only on a consolidated basis, which is more reflective
of the financial position, results of operations and cash flows of the Parent Corporation and its activities.
Condensed Balance Sheets
December 31
|
|
|
|
|
|
|
|
|
2008
|
|
2007
|
Assets
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,975,442
|
|
$
|
3,157,670
|
Investments in affiliates:
|
|
|
|
|
|
|
Banks
|
|
|
5,419,990
|
|
|
5,772,944
|
Nonbanks
|
|
|
539,891
|
|
|
576,323
|
Premises and equipment, net
|
|
|
9,177
|
|
|
8,356
|
Other assets
|
|
|
306,396
|
|
|
286,465
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
8,250,896
|
|
$
|
9,801,758
|
|
|
|
|
|
|
|
Liabilities and Shareholders Equity
|
|
|
|
|
|
|
Commercial paper
|
|
$
|
17,264
|
|
$
|
798,986
|
Other liabilities
|
|
|
356,610
|
|
|
372,461
|
Long-term borrowings:
|
|
|
|
|
|
|
Medium-term notes Series E, F and MiNotes
|
|
|
463,040
|
|
|
451,509
|
4.375% senior notes
|
|
|
599,653
|
|
|
599,080
|
5.626% senior notes
|
|
|
399,323
|
|
|
398,162
|
Floating rate subordinated notes due to M&I Capital Trust A
|
|
|
32,709
|
|
|
33,612
|
7.50% subordinated notes
|
|
|
22,331
|
|
|
|
5.80% junior subordinated deferrable interest debentures due to Gold Banc Trust III
|
|
|
15,896
|
|
|
15,583
|
Floating rate junior subordinated deferrable interest debentures due to Gold Banc
Trust IV
|
|
|
30,119
|
|
|
30,475
|
6.00% junior subordinated deferrable interest debentures due to Gold Banc Trust V
|
|
|
37,883
|
|
|
37,767
|
10.60% junior subordinated deferrable interest debentures due to Trustcorp Statutory Trust I
|
|
|
15,887
|
|
|
16,394
|
Floating rate junior subordinated deferrable interest debentures due to EBC Statutory Trust I
|
|
|
|
|
|
10,000
|
Floating rate junior subordinated deferrable interest debentures due to EBC Statutory Trust II
|
|
|
|
|
|
5,000
|
|
|
|
|
|
|
|
Total long-term borrowings
|
|
|
1,616,841
|
|
|
1,597,582
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,990,715
|
|
|
2,769,029
|
Shareholders equity
|
|
|
6,260,181
|
|
|
7,032,729
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
8,250,896
|
|
$
|
9,801,758
|
|
|
|
|
|
|
|
Scheduled maturities
of long-term borrowings are $1,005,387 in 2009, $18,731 in 2010, $282,045 in 2011, $14,466 in 2012 and $22,592 in 2013. See Note 14 in Notes to Consolidated Financial Statements for a description of the long-term borrowings.
136
Notes to Consolidated Financial Statements(Continued)
December 31, 2008, 2007, and 2006 ($000s except share data)
Consolidating Balance Sheets
December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
M&I LLC
|
|
Marshall &
Ilsley
Corporation
|
|
Eliminations
& Reclassifi-
cations
|
|
|
Consolidated
Parent
Corporation
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
380,667
|
|
$
|
1,594,775
|
|
$
|
|
|
|
$
|
1,975,442
|
Investments in affiliates:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Banks
|
|
|
5,419,990
|
|
|
|
|
|
|
|
|
|
5,419,990
|
Nonbanks
|
|
|
539,891
|
|
|
|
|
|
|
|
|
|
539,891
|
M&I LLC
|
|
|
|
|
|
4,817,366
|
|
|
(4,817,366
|
)
|
|
|
|
Premises and equipment, net
|
|
|
7,208
|
|
|
1,969
|
|
|
|
|
|
|
9,177
|
Other assets
|
|
|
75,970
|
|
|
241,684
|
|
|
(11,258
|
)
|
|
|
306,396
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
6,423,726
|
|
$
|
6,655,794
|
|
$
|
(4,828,624
|
)
|
|
$
|
8,250,896
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper
|
|
$
|
|
|
$
|
17,264
|
|
$
|
|
|
|
$
|
17,264
|
Other liabilities
|
|
|
29,165
|
|
|
338,703
|
|
|
(11,258
|
)
|
|
|
356,610
|
Long-term borrowings
|
|
|
1,577,195
|
|
|
39,646
|
|
|
|
|
|
|
1,616,841
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,606,360
|
|
|
395,613
|
|
|
(11,258
|
)
|
|
|
1,990,715
|
Shareholders equity
|
|
|
4,817,366
|
|
|
6,260,181
|
|
|
(4,817,366
|
)
|
|
|
6,260,181
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
6,423,726
|
|
$
|
6,655,794
|
|
$
|
(4,828,624
|
)
|
|
$
|
8,250,896
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
137
Notes to Consolidated Financial Statements(Continued)
December 31, 2008, 2007, and 2006 ($000s except share data)
Condensed Statements of Income
Years Ended December 31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends:
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank affiliates
|
|
$
|
66,259
|
|
|
$
|
168
|
|
|
$
|
301,898
|
|
Nonbank affiliates
|
|
|
80,885
|
|
|
|
402
|
|
|
|
34,391
|
|
Interest from affiliates
|
|
|
46,267
|
|
|
|
82,010
|
|
|
|
79,845
|
|
Service fees and other
|
|
|
102,291
|
|
|
|
133,077
|
|
|
|
116,418
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income
|
|
|
295,702
|
|
|
|
215,657
|
|
|
|
532,552
|
|
Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
100,044
|
|
|
|
118,908
|
|
|
|
115,859
|
|
Salaries and employee benefits
|
|
|
52,513
|
|
|
|
61,166
|
|
|
|
58,779
|
|
Administrative and general
|
|
|
54,003
|
|
|
|
110,886
|
|
|
|
51,991
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expense
|
|
|
206,560
|
|
|
|
290,960
|
|
|
|
226,629
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income taxes and equity in undistributed net income of affiliates
|
|
|
89,142
|
|
|
|
(75,303
|
)
|
|
|
305,923
|
|
Benefit from income taxes
|
|
|
(17,603
|
)
|
|
|
(29,629
|
)
|
|
|
(15,840
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before equity in undistributed net income of affiliates
|
|
|
106,745
|
|
|
|
(45,674
|
)
|
|
|
321,763
|
|
Discontinued operations, net of income taxes
|
|
|
|
|
|
|
500,646
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before equity in undistributed net income of affiliates
|
|
|
106,745
|
|
|
|
454,972
|
|
|
|
321,763
|
|
Equity in undistributed net income (loss) of affiliates, net of dividends paid:
|
|
|
|
|
|
|
|
|
|
|
|
|
Banks
|
|
|
(2,087,410
|
)
|
|
|
470,535
|
|
|
|
281,346
|
|
Nonbanks
|
|
|
(62,797
|
)
|
|
|
225,429
|
|
|
|
204,729
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(2,043,462
|
)
|
|
$
|
1,150,936
|
|
|
$
|
807,838
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
138
Notes to Consolidated Financial Statements(Continued)
December 31, 2008, 2007, and 2006 ($000s except share data)
Consolidating Statements of Income
Year Ended December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
M&I LLC
|
|
|
Marshall &
Ilsley
Corporation
|
|
|
Eliminations &
Reclassifications
|
|
Consolidated
Parent
Corporation
|
|
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank affiliates
|
|
$
|
66,259
|
|
|
$
|
|
|
|
$
|
|
|
$
|
66,259
|
|
Nonbank affiliates
|
|
|
80,875
|
|
|
|
10
|
|
|
|
|
|
|
80,885
|
|
Interest from affiliates
|
|
|
14,438
|
|
|
|
31,829
|
|
|
|
|
|
|
46,267
|
|
Service fees and other
|
|
|
(7,534
|
)
|
|
|
109,825
|
|
|
|
|
|
|
102,291
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income
|
|
|
154,038
|
|
|
|
141,664
|
|
|
|
|
|
|
295,702
|
|
Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
83,833
|
|
|
|
16,211
|
|
|
|
|
|
|
100,044
|
|
Salaries and employee benefits
|
|
|
(10
|
)
|
|
|
52,523
|
|
|
|
|
|
|
52,513
|
|
Administrative and general
|
|
|
2,173
|
|
|
|
51,830
|
|
|
|
|
|
|
54,003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expense
|
|
|
85,996
|
|
|
|
120,564
|
|
|
|
|
|
|
206,560
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes and equity in undistributed net income of affiliates
|
|
|
68,042
|
|
|
|
21,100
|
|
|
|
|
|
|
89,142
|
|
Provision for (benefit from) income taxes
|
|
|
(28,542
|
)
|
|
|
10,939
|
|
|
|
|
|
|
(17,603
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before equity in undistributed net income of affiliates
|
|
|
96,584
|
|
|
|
10,161
|
|
|
|
|
|
|
106,745
|
|
Equity in undistributed net loss of affiliates, net of dividends paid:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Banks
|
|
|
(2,087,410
|
)
|
|
|
|
|
|
|
|
|
|
(2,087,410
|
)
|
Nonbanks
|
|
|
(62,797
|
)
|
|
|
|
|
|
|
|
|
|
(62,797
|
)
|
M&I LLC
|
|
|
|
|
|
|
(2,053,623
|
)
|
|
|
2,053,623
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(2,053,623
|
)
|
|
$
|
(2,043,462
|
)
|
|
$
|
2,053,623
|
|
$
|
(2,043,462
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
139
Notes to Consolidated Financial Statements(Continued)
December 31, 2008, 2007, and 2006 ($000s except share data)
Condensed Statements of Cash Flows
Years Ended December 31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Cash Flows From Operating Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(2,043,462
|
)
|
|
$
|
1,150,936
|
|
|
$
|
807,838
|
|
Non-cash items included in income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in undistributed net loss (income) of affiliates
|
|
|
2,150,207
|
|
|
|
(695,964
|
)
|
|
|
(486,075
|
)
|
Depreciation and amortization
|
|
|
4,582
|
|
|
|
3,586
|
|
|
|
4,340
|
|
Excess tax benefit from stockbased comp. arrangements
|
|
|
55
|
|
|
|
907
|
|
|
|
(805
|
)
|
Gain on sale of Metavante
|
|
|
|
|
|
|
(525,576
|
)
|
|
|
|
|
Other
|
|
|
(29,106
|
)
|
|
|
64,984
|
|
|
|
15,685
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
82,276
|
|
|
|
(1,127
|
)
|
|
|
340,983
|
|
|
|
|
|
Cash Flows From Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Increases in indebtedness of affiliates
|
|
|
|
|
|
|
(16,350
|
)
|
|
|
(476,150
|
)
|
Decreases in indebtedness of affiliates
|
|
|
|
|
|
|
1,319,700
|
|
|
|
460,710
|
|
Increases in investments in affiliates
|
|
|
(1,739,728
|
)
|
|
|
(121,106
|
)
|
|
|
(215,753
|
)
|
Net proceeds from the Separation
|
|
|
|
|
|
|
1,639,034
|
|
|
|
|
|
Purchases of premises and equipment, net
|
|
|
(2,130
|
)
|
|
|
(1,154
|
)
|
|
|
(913
|
)
|
Other
|
|
|
(8,434
|
)
|
|
|
55,202
|
|
|
|
40,034
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by investing activities
|
|
|
(1,750,292
|
)
|
|
|
2,875,326
|
|
|
|
(192,072
|
)
|
|
|
|
|
Cash Flows From Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends paid on common stock
|
|
|
(327,820
|
)
|
|
|
(313,298
|
)
|
|
|
(261,535
|
)
|
Proceeds from the issuance of commercial paper
|
|
|
33,741,932
|
|
|
|
19,190,183
|
|
|
|
5,055,511
|
|
Principal payments on commercial paper
|
|
|
(34,523,654
|
)
|
|
|
(18,912,746
|
)
|
|
|
(4,835,925
|
)
|
Proceeds from the issuance of long-term borrowings
|
|
|
17,489
|
|
|
|
|
|
|
|
250,000
|
|
Payments on long-term borrowings
|
|
|
(34,066
|
)
|
|
|
(230,214
|
)
|
|
|
(201,037
|
)
|
Purchases of common stock
|
|
|
(130,870
|
)
|
|
|
(431,150
|
)
|
|
|
(41,791
|
)
|
Proceeds from the issuance of preferred stock
|
|
|
1,715,000
|
|
|
|
|
|
|
|
|
|
Proceeds from the issuance of common stock
|
|
|
27,832
|
|
|
|
512,243
|
|
|
|
84,042
|
|
Excess tax benefit from stock-based comp. arrangements
|
|
|
(55
|
)
|
|
|
(907
|
)
|
|
|
805
|
|
Other
|
|
|
|
|
|
|
(7,800
|
)
|
|
|
(10,400
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
485,788
|
|
|
|
(193,689
|
)
|
|
|
39,670
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents
|
|
|
(1,182,228
|
)
|
|
|
2,680,510
|
|
|
|
188,581
|
|
Cash and cash equivalents, beginning of year
|
|
|
3,157,670
|
|
|
|
477,160
|
|
|
|
288,579
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year
|
|
$
|
1,975,442
|
|
|
$
|
3,157,670
|
|
|
$
|
477,160
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
140
Notes to Consolidated Financial Statements(Continued)
December 31, 2008, 2007, and 2006 ($000s except share data)
Consolidating Statements of Cash Flows
Year Ended December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
M&I LLC
|
|
|
Marshall &
Ilsley
Corporation
|
|
|
Eliminations &
Reclassifications
|
|
|
Consolidated
Parent
Corporation
|
|
Cash Flows From Operating Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(2,053,623
|
)
|
|
$
|
(2,043,462
|
)
|
|
$
|
2,053,623
|
|
|
$
|
(2,043,462
|
)
|
Non-cash items included in income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in undistributed net loss of affiliates
|
|
|
2,150,207
|
|
|
|
2,053,623
|
|
|
|
(2,053,623
|
)
|
|
|
2,150,207
|
|
Depreciation and amortization
|
|
|
3,968
|
|
|
|
614
|
|
|
|
|
|
|
|
4,582
|
|
Excess tax benefit from stockbased comp. arrangements
|
|
|
55
|
|
|
|
|
|
|
|
|
|
|
|
55
|
|
Other
|
|
|
(40,555
|
)
|
|
|
11,449
|
|
|
|
|
|
|
|
(29,106
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
60,052
|
|
|
|
22,224
|
|
|
|
|
|
|
|
82,276
|
|
|
|
|
|
|
Cash Flows From Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increases in investments in affiliates
|
|
|
(452,976
|
)
|
|
|
(1,286,752
|
)
|
|
|
|
|
|
|
(1,739,728
|
)
|
Purchases of premises and equipment, net
|
|
|
35
|
|
|
|
(2,165
|
)
|
|
|
|
|
|
|
(2,130
|
)
|
Other
|
|
|
(8,333
|
)
|
|
|
(101
|
)
|
|
|
|
|
|
|
(8,434
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(461,274
|
)
|
|
|
(1,289,018
|
)
|
|
|
|
|
|
|
(1,750,292
|
)
|
|
|
|
|
|
Cash Flows From Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends paid
|
|
|
|
|
|
|
(327,820
|
)
|
|
|
|
|
|
|
(327,820
|
)
|
Proceeds from issuance of commercial paper
|
|
|
|
|
|
|
33,741,932
|
|
|
|
|
|
|
|
33,741,932
|
|
Principal payments on commercial paper
|
|
|
(244,739
|
)
|
|
|
(34,278,915
|
)
|
|
|
|
|
|
|
(34,523,654
|
)
|
Proceeds from issuance of long-term borrowings
|
|
|
|
|
|
|
17,489
|
|
|
|
|
|
|
|
17,489
|
|
Payments on long-term borrowings
|
|
|
(21,520
|
)
|
|
|
(12,546
|
)
|
|
|
|
|
|
|
(34,066
|
)
|
Purchases of common stock
|
|
|
|
|
|
|
(130,870
|
)
|
|
|
|
|
|
|
(130,870
|
)
|
Proceeds from issuance of preferred stock
|
|
|
|
|
|
|
1,715,000
|
|
|
|
|
|
|
|
1,715,000
|
|
Proceeds from issuance of common stock
|
|
|
|
|
|
|
27,832
|
|
|
|
|
|
|
|
27,832
|
|
Excess tax benefit from stock-based comp. arrangements
|
|
|
(55
|
)
|
|
|
|
|
|
|
|
|
|
|
(55
|
)
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
|
(266,314
|
)
|
|
|
752,102
|
|
|
|
|
|
|
|
485,788
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
|
(667,536
|
)
|
|
|
(514,692
|
)
|
|
|
|
|
|
|
(1,182,228
|
)
|
Cash and cash equivalents, beginning of year
|
|
|
1,048,203
|
|
|
|
2,109,467
|
|
|
|
|
|
|
|
3,157,670
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year
|
|
$
|
380,667
|
|
|
$
|
1,594,775
|
|
|
$
|
|
|
|
$
|
1,975,442
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
141
Quarterly Financial Information (Unaudited)
Following is unaudited financial information for each of the calendar
quarters during the years ended December 31, 2008 and 2007. ($000s except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
Dec. 31
|
|
|
Sept. 30
|
|
June 30
|
|
|
March 31
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Interest and Fee Income
|
|
$
|
785,425
|
|
|
$
|
798,651
|
|
$
|
814,608
|
|
|
$
|
879,010
|
Total Interest Expense
|
|
|
323,386
|
|
|
|
358,002
|
|
|
366,970
|
|
|
|
448,626
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Income
|
|
|
462,039
|
|
|
|
440,649
|
|
|
447,638
|
|
|
|
430,384
|
Provision for Loan and Lease Losses
|
|
|
850,443
|
|
|
|
154,962
|
|
|
885,981
|
|
|
|
146,321
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Income (Loss) After Provision for Loan and Lease Losses
|
|
|
(388,404
|
)
|
|
|
285,687
|
|
|
(438,343
|
)
|
|
|
284,063
|
Other Income
|
|
|
166,053
|
|
|
|
183,832
|
|
|
186,997
|
|
|
|
211,233
|
Other Expense
|
|
|
1,937,920
|
|
|
|
360,003
|
|
|
380,395
|
|
|
|
315,787
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) Before Income Taxes
|
|
|
(2,160,271
|
)
|
|
|
109,516
|
|
|
(631,741
|
)
|
|
|
179,509
|
Provision (Benefit) for Income Taxes
|
|
|
(281,253
|
)
|
|
|
26,378
|
|
|
(237,950
|
)
|
|
|
33,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) from Continuing Operations
|
|
|
(1,879,018
|
)
|
|
|
83,138
|
|
|
(393,791
|
)
|
|
|
146,209
|
Discontinued Operations, Net of Tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss)
|
|
$
|
(1,879,018
|
)
|
|
$
|
83,138
|
|
$
|
(393,791
|
)
|
|
$
|
146,209
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Dividends
|
|
|
(12,737
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) Available to Common Shareholders
|
|
$
|
(1,891,755
|
)
|
|
$
|
83,138
|
|
$
|
(393,791
|
)
|
|
$
|
146,209
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Common Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) from Continuing Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(7.25
|
)
|
|
$
|
0.32
|
|
$
|
(1.52
|
)
|
|
$
|
0.56
|
Diluted
|
|
|
(7.25
|
)
|
|
|
0.32
|
|
|
(1.52
|
)
|
|
|
0.56
|
Net Income (Loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(7.25
|
)
|
|
$
|
0.32
|
|
$
|
(1.52
|
)
|
|
$
|
0.56
|
Diluted
|
|
|
(7.25
|
)
|
|
|
0.32
|
|
|
(1.52
|
)
|
|
|
0.56
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Interest and Fee Income
|
|
$
|
928,555
|
|
|
$
|
939,133
|
|
$
|
911,961
|
|
|
$
|
889,516
|
Total Interest Expense
|
|
|
509,729
|
|
|
|
535,961
|
|
|
512,225
|
|
|
|
495,033
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Income
|
|
|
418,826
|
|
|
|
403,172
|
|
|
399,736
|
|
|
|
394,483
|
Provision for Loan and Lease Losses
|
|
|
235,060
|
|
|
|
41,526
|
|
|
26,026
|
|
|
|
17,148
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Income (Loss) After Provision for Loan and Lease Losses
|
|
|
183,766
|
|
|
|
361,646
|
|
|
373,710
|
|
|
|
377,335
|
Other Income
|
|
|
203,645
|
|
|
|
183,306
|
|
|
186,565
|
|
|
|
155,550
|
Other Expense
|
|
|
446,094
|
|
|
|
293,475
|
|
|
294,334
|
|
|
|
281,040
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) Before Income Taxes
|
|
|
(58,683
|
)
|
|
|
251,477
|
|
|
265,941
|
|
|
|
251,845
|
Provision (Benefit) for Income Taxes
|
|
|
(34,238
|
)
|
|
|
77,751
|
|
|
87,064
|
|
|
|
83,064
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) from Continuing Operations
|
|
|
(24,445
|
)
|
|
|
173,726
|
|
|
178,877
|
|
|
|
168,781
|
Discontinued Operations, Net of Tax
|
|
|
518,391
|
|
|
|
46,213
|
|
|
41,412
|
|
|
|
47,981
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income Available to Common Shareholders
|
|
$
|
493,946
|
|
|
$
|
219,939
|
|
$
|
220,289
|
|
|
$
|
216,762
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Common Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) from Continuing Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.09
|
)
|
|
$
|
0.66
|
|
$
|
0.69
|
|
|
$
|
0.66
|
Diluted
|
|
|
(0.09
|
)
|
|
|
0.65
|
|
|
0.68
|
|
|
|
0.65
|
Net Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.86
|
|
|
$
|
0.84
|
|
$
|
0.85
|
|
|
$
|
0.85
|
Diluted
|
|
|
1.83
|
|
|
|
0.83
|
|
|
0.83
|
|
|
|
0.83
|
142
Quarterly Financial Information (Unaudited) (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
Common Dividends Declared
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
0.31
|
|
$
|
0.27
|
|
$
|
0.24
|
|
$
|
0.21
|
|
$
|
0.18
|
Second Quarter
|
|
|
0.32
|
|
|
0.31
|
|
|
0.27
|
|
|
0.24
|
|
|
0.21
|
Third Quarter
|
|
|
0.32
|
|
|
0.31
|
|
|
0.27
|
|
|
0.24
|
|
|
0.21
|
Fourth Quarter
|
|
|
0.32
|
|
|
0.31
|
|
|
0.27
|
|
|
0.24
|
|
|
0.21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1.27
|
|
$
|
1.20
|
|
$
|
1.05
|
|
$
|
0.93
|
|
$
|
0.81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Price Range of
Stock*
(Low and High Close)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Post-
Separation
|
|
Pre-
Separation
|
|
|
|
|
|
|
|
|
2008
|
|
2007
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
First Quarter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Low
|
|
$
|
21.71
|
|
$
|
|
|
$
|
46.18
|
|
$
|
40.91
|
|
$
|
40.21
|
|
$
|
36.18
|
High
|
|
|
28.98
|
|
|
|
|
|
49.23
|
|
|
45.35
|
|
|
43.65
|
|
|
40.39
|
Second Quarter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Low
|
|
|
15.33
|
|
|
|
|
|
45.86
|
|
|
43.36
|
|
|
41.23
|
|
|
36.60
|
High
|
|
|
26.36
|
|
|
|
|
|
49.83
|
|
|
46.44
|
|
|
45.06
|
|
|
41.15
|
Third Quarter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Low
|
|
|
11.50
|
|
|
|
|
|
40.41
|
|
|
44.76
|
|
|
42.83
|
|
|
37.32
|
High
|
|
|
29.50
|
|
|
|
|
|
48.21
|
|
|
48.54
|
|
|
47.28
|
|
|
41.21
|
Fourth Quarter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Low
|
|
|
11.74
|
|
|
26.36
|
|
|
41.96
|
|
|
45.53
|
|
|
40.18
|
|
|
40.28
|
High
|
|
|
22.98
|
|
|
32.58
|
|
|
45.97
|
|
|
49.07
|
|
|
44.40
|
|
|
44.43
|
*
|
|
The results for 2007 have been separated to show the prices prior to and after the Separation on November 1, 2007. As a result, the fourth quarter pre-Separation prices are
through October 31, 2007 only. The post-Separation prices are from November 1, 2007 through December 31, 2007.
|
143
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of Marshall & Ilsley Corporation:
We have audited the accompanying consolidated balance sheets
of Marshall & Ilsley Corporation and subsidiaries (the Corporation) as of December 31, 2008 and 2007, and the related consolidated statements of income, shareholders equity, and cash flows for each of the three years
in the period ended December 31, 2008. These financial statements are the responsibility of the Corporations management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Marshall & Ilsley Corporation and subsidiaries as of December 31, 2008 and 2007,
and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2008, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the Corporations internal control over financial reporting as of December 31, 2008, based on the criteria established in
Internal ControlIntegrated Framework
issued by the Committee
of Sponsoring Organizations of the Treadway Commission and our report dated February 27, 2009, expressed an unqualified opinion on the Corporations internal control over financial reporting.
/s/ Deloitte & Touche LLP
Milwaukee, Wisconsin
February 27, 2009
144
ITEM 9.
|
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
|
Not applicable.
ITEM 9A.
|
CONTROLS AND PROCEDURES
|
Evaluation of Disclosure Controls and Procedures
The Corporation maintains a set of disclosure controls and procedures that are designed to ensure that information required to be disclosed by the
Corporation in the reports filed by it under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms, and to ensure that information
required to be disclosed by the Corporation in such reports is accumulated and communicated to the Corporations 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 the Chief Executive Officer and President and the 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(e) of the Exchange Act. Based on that evaluation, the Chief Executive Officer and President and the Senior Vice President and Chief Financial Officer concluded
that the Corporations 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.
Managements Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal
control over financial reporting. As such term is defined in Exchange Act Rule 13a-15(f), internal control over financial reporting is a process designed by, or under the supervision of, the principal executive and principal financial officers, or
persons performing similar functions, and effected by the board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with accounting principles generally accepted in the United States. Internal control over financial reporting includes those policies and procedures that:
|
(1)
|
|
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of assets of the Corporation;
|
|
(2)
|
|
provide reasonable assurance that transactions are recorded as necessary to permit preparation of the financial statements in accordance with accounting principles generally
accepted in the United States, and that receipts and expenditures of the Corporation are being made only in accordance with authorizations of management and the directors of the Corporation; and
|
|
(3)
|
|
provide reasonable assurance regarding prevention of unauthorized acquisition, use, or disposition of the Corporations assets that could have a material effect on the
financial statements.
|
Management conducted an
evaluation of the effectiveness of the Corporations internal control over financial reporting based on the criteria in
Internal ControlIntegrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Based on this evaluation under the criteria in
Internal ControlIntegrated Framework
, management concluded that internal control over financial reporting was effective as of December 31, 2008.
The effectiveness of internal control over financial reporting as of
December 31, 2008 has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report dated February 27, 2009, which is included herein.
Changes in Internal Controls
There have been no changes in the Corporations internal control over
financial reporting identified in connection with the evaluation discussed above that occurred during the Corporations fourth fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Corporations
internal control over financial reporting.
145
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of Marshall & Ilsley Corporation:
We have audited the internal control over financial reporting of
Marshall & Ilsley Corporation and subsidiaries (the Corporation) as of December 31, 2008, based on criteria established in
Internal ControlIntegrated Framework
issued by the Committee of Sponsoring
Organizations of the Treadway Commission. The Corporations management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting,
included in the accompanying Managements Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Corporations internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our
audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk,
and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a process designed by, or under the supervision of, the companys principal executive
and principal financial officers, or persons performing similar functions, and effected by the companys board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A companys internal control over financial reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation
of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and
(3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the companys assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial
reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness
of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Corporation maintained, in all material
respects, effective internal control over financial reporting as of December 31, 2008, based on the criteria established in
Internal ControlIntegrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway
Commission.
We have also audited, in accordance with the
standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended December 31, 2008, of the Corporation and our report dated February 27, 2009, expressed an
unqualified opinion on those financial statements.
/s/ Deloitte & Touche LLP
Milwaukee, Wisconsin
February 27, 2009
146
ITEM 9B.
|
|
OTHER INFORMATION
|
Not applicable.
147
PART III
ITEM 10.
|
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
|
Incorporated herein by reference to M&Is definitive proxy statement for the Annual Meeting of Shareholders to be held on April 28, 2009,
except for information as to executive officers and M&Is Code of Business Conduct and Ethics which is set forth in Part I of this report.
ITEM 11.
|
EXECUTIVE COMPENSATION
|
Incorporated herein by reference to M&Is definitive proxy statement for the Annual Meeting of Shareholders to be held on April 28, 2009.
ITEM 12.
|
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
|
Incorporated herein by reference to M&Is definitive proxy statement for the Annual Meeting of Shareholders to be
held on April 28, 2009.
ITEM 13.
|
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
|
Incorporated herein by reference to M&Is definitive proxy statement for the Annual Meeting of Shareholders to be
held on April 28, 2009, except for information as to executive officers which is set forth in Part I of this report.
ITEM 14.
|
PRINCIPAL ACCOUNTANT FEES AND SERVICES
|
Incorporated herein by reference to M&Is definitive proxy statement for the Annual Meeting of Shareholders to be held on April 28, 2009.
148
PART IV
ITEM 15.
|
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
|
(a)
|
|
1. Financial Statements
|
Consolidated Financial Statements:
Balance
SheetsDecember 31, 2008 and December 31, 2007
Statements of Income years ended December 31, 2008, 2007 and
2006
Statements of Cash Flowsyears ended December 31, 2008, 2007 and 2006
Statements of Shareholders Equityyears ended December 31, 2008, 2007 and 2006
Notes to Consolidated Financial Statements
Quarterly Financial Information (Unaudited)
Report of Independent Registered Public Accounting Firm
|
|
2. Financial Statement Schedules
|
All schedules are omitted because they are not required, not applicable or the required information is contained elsewhere.
See Index to Exhibits of this Form 10-K, which is incorporated herein by reference. Shareholders may obtain a copy of any Exhibit free of charge by
calling M&Is Shareholder Information Line at 1 (800) 642-2657.
149
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
|
|
|
By:
|
|
/s/ Mark F.
Furlong
|
|
|
Mark F. Furlong
|
|
|
President and Chief Executive Officer
|
|
Date: February 27, 2009
|
Pursuant to the
requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:
|
|
|
/s/ Gregory A.
Smith
|
|
|
Gregory A. Smith
Senior Vice President and Chief
Financial Officer (Principal Financial Officer)
|
|
Date: February 27, 2009
|
|
|
/s/ Patricia R.
Justiliano
|
|
|
Patricia R. Justiliano
Senior Vice President and
Corporate Controller
(Principal Accounting Officer)
|
|
Date: February 27, 2009
|
Directors:
|
|
Andrew N. Baur, Jon F. Chait, John W. Daniels, Jr., Mark F. Furlong, Ted D. Kellner, Dennis J. Kuester, David J. Lubar, Katharine C. Lyall, John A. Mellowes, Robert J.
OToole, San W. Orr, Jr., Peter M. Platten, III, John S. Shiely, Debra S. Waller, George E. Wardeberg and James B. Wigdale.
|
|
|
|
|
|
By:
|
|
/s/ Randall J.
Erickson
|
|
Date: February 27, 2009
|
|
|
Randall J. Erickson
|
|
|
|
|
As Attorney-In-Fact*
|
|
|
|
|
|
|
|
*
|
|
Pursuant to authority granted by powers of attorney, copies of which are filed herewith.
|
150
MARSHALL & ILSLEY CORPORATION
INDEX TO EXHIBITS
(Item 15(a)3)
ITEM
|
|
|
|
|
(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 Old M&Is Current Report on Form 8-K filed April 9, 2007, SEC File No. 1-15403
|
|
|
|
|
|
(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 Old M&Is Current Report on Form 8-K filed April 9, 2007, SEC File No. 1-15403
|
|
|
|
(3)
|
|
(a)
|
|
Restated Articles of Incorporation, incorporated by reference to M&Is Registration Statement on Form S-3 filed on November 6, 2007, SEC File No. 333-147162
|
|
|
|
|
|
(b)
|
|
Articles of Amendment to the Companys Restated Articles of Incorporation, incorporated by reference to M&Is Current Report on Form 8-K filed November 14, 2008, SEC File No.
1-33488
|
|
|
|
|
|
(c)
|
|
Amended and Restated By-Laws, incorporated by reference to M&Is Registration Statement on Form S-3 filed on November 6, 2007, SEC File No. 333-147162
|
|
|
|
(4)
|
|
(a)
|
|
Warrant for Purchase of Shares of Common Stock, incorporated by reference to M&Is Current Report on Form 8-K filed November 14, 2008, SEC File No. 1-33488
|
|
|
|
|
|
(b)
|
|
Form of Certificate for the Senior Preferred Stock, incorporated by reference to M&Is Current Report on Form 8-K filed November 14, 2008, SEC File No. 1-33488
|
|
|
|
(10)
|
|
(a)
|
|
Deferred Compensation Trust between Marshall & Ilsley Corporation and Bessemer Trust Company dated April 28, 1987, as amended, incorporated by reference to M&Is Annual Report on
Form 10-K for the fiscal year ended December 31, 1988, SEC File No. 1-15403*
|
|
|
(b)
|
|
Marshall & Ilsley Corporation Amended and Restated Supplementary Retirement Benefits Plan, incorporated by reference to Old M&Is Annual Report on Form 10-K for the fiscal year
ended December 31, 1996, SEC File No. 1-15403*
|
|
|
|
|
|
(c)
|
|
Letter Agreement, dated June 17, 2002, between M&I Marshall & Ilsley Bank and Andrew N. Baur and Noncompete Agreement, dated June 17, 2002, between M&I and Andrew N. Baur,
incorporated by reference to Old M&Is Registration Statement on Form S-4 (Reg. No. 333-92472)*
|
|
|
|
|
|
(d)
|
|
Amended and Restated Directors Deferred Compensation Plan of Marshall & Ilsley Corporation*
|
|
|
|
|
|
(e)
|
|
Marshall & Ilsley Corporation Amended and Restated Deferred Compensation Trust II between M&I and Marshall & Ilsley Trust Company National Association, incorporated by reference to
Old M&Is Quarterly Report on Form 10-Q for the quarter ended September 30, 2003, SEC File No. 1-15403*
|
|
|
|
|
|
(f)
|
|
Marshall & Ilsley Corporation Amended and Restated Deferred Compensation Trust III between M&I and Marshall & Ilsley Trust Company National Association, incorporated by reference to
Old M&Is Quarterly Report on Form 10-Q for the quarter ended September 30, 2003, SEC File No. 1-15403*
|
|
|
|
|
|
(g)
|
|
Marshall & Ilsley Corporation 2003 Death Benefit Plan, incorporated by reference to Old M&Is Annual Report on Form 10-K for the fiscal year ended December 31,
2003*
|
|
|
|
|
|
(h)
|
|
Death Benefit Award Agreement, dated December 30, 2003, between M&I and Mr. Kuester, incorporated by reference to Old M&Is Annual Report on Form 10-K for the fiscal year ended
December 31, 2003*
|
|
|
|
|
|
(i)
|
|
Death Benefit Award Agreement, dated December 30, 2003, between M&I and Mr. Wigdale, incorporated by reference to Old M&Is Annual Report on Form 10-K for the fiscal year ended
December 31, 2003*
|
|
|
|
|
|
(j)
|
|
Marshall & Ilsley Corporation Amended and Restated Annual Executive Incentive Compensation Plan, incorporated by reference to Old M&Is Annual Report on Form 10- K for the fiscal
year ended December 31, 2003*
|
|
|
|
|
|
(k)
|
|
Marshall & Ilsley Corporation Amended and Restated Executive Deferred Compensation Plan*
|
151
|
|
|
|
|
|
|
|
|
|
(l)
|
|
Consulting Agreement dated December 15, 2004, between M&I and Mr. Wigdale, incorporated by reference to Old M&Is Current Report on Form 8-K filed December 17, 2004, SEC File No.
1-15403*
|
|
|
|
|
|
(m)
|
|
Consulting Agreement dated December 15, 2004 between Southwest Bank of St. Louis and Mr. Baur, incorporated by reference to Old M&Is Current Report on Form 8-K filed December 17, 2004,
SEC File No. 1-15403*
|
|
|
|
|
|
(n)
|
|
2005 Directors Deferred Compensation Plan of Marshall & Ilsley Corporation*
|
|
|
|
|
|
(o)
|
|
Marshall & Ilsley Corporation 2005 Executive Deferred Compensation Plan*
|
|
|
|
|
|
(p)
|
|
Form of Restricted Stock Agreement, incorporated by reference to Old M&Is Quarterly Report on Form 10-Q for the quarter ended June 30, 2005, SEC File No. 1-15403*
|
|
|
|
|
|
(q)
|
|
Amended and Restated Marshall & Ilsley Corporation Nonqualified Retirement Benefit Plan, incorporated by reference to Old M&Is Annual Report on Form 10-K for the year ended
December 31, 2005, SEC File No. 1-15403*
|
|
|
|
|
|
(r)
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Marshall & Ilsley Corporation Amended and Restated 1994 Long-Term Incentive Plan for Executives*
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(s)
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Transition and Consulting Agreement between the M&I and Dennis J. Kuester dated December 21, 2006, incorporated by reference to Old M&Is Current Report on Form 8- K dated December
21, 2006, SEC File No. 1-15403*
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(t)
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Letter Agreement from M&I to Mark F. Furlong dated December 21, 2006 Containing the Terms of the Supplemental Executive Retirement Benefit, incorporated by reference to Old M&Is
Current Report on Form 8-K dated December 21, 2006, SEC File No. 1- 15403*
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(u)
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Marshall & Ilsley Corporation 2006 Equity Incentive Plan, as amended October 19, 2006, incorporated by reference to Old M&Is Annual Report on Form 10-K for the year ended December
31, 2006, SEC File No. 1-15403*
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(v)
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Marshall & Ilsley Corporation 2003 Executive Stock Option and Restricted Stock Plan, effective January 1, 2006, retroactive to January 1, 2005, as further amended on February 16, 2006 and
October 19, 2006, incorporated by reference to Old M&Is Annual Report on Form 10-K for the year ended December 31, 2006, SEC File No. 1-15403*
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(w)
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Marshall & Ilsley Corporation 2000 Executive Stock Option and Restricted Stock Plan, effective January 1, 2006, retroactive to January 1, 2005, as further amended on October 19, 2006,
incorporated by reference to Old M&Is Annual Report on Form 10-K for the year ended December 31, 2006, SEC File No. 1-15403*
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(x)
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Marshall & Ilsley Corporation Amended and Restated 1997 Executive Stock Option and Restricted Stock Plan, effective January 1, 2006, retroactive to January 1, 2005, as further amended on
October 19, 2006, incorporated by reference to Old M&Is Annual Report on Form 10-K for the year ended December 31, 2006, SEC File No. 1-15403*
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(y)
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Marshall & Ilsley Corporation 1995 Directors Stock Option Plan, as amended on August 15, 2002, as further amended on October 19, 2002, incorporated by reference to Old M&Is Annual
Report on Form 10-K for the year ended December 31, 2006, SEC File No. 1-15403*
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(z)
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Marshall & Ilsley Corporation 1993 Executive Stock Option Plan, as amended on February 13, 1997, December 14, 1995, and December 12, 1996, as further amended on October 19, 2006,
incorporated by reference to Old M&Is Annual Report on Form 10-K for the year ended December 31, 2006, SEC File No. 1-15403*
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(aa)
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Gold Banc Corporation, Inc. 1996 Equity Compensation Plan, as amended February 2, 2001, as further amended on October 19, 2006, incorporated by reference to Old M&Is Annual Report on
Form 10-K for the year ended December 31, 2006, SEC File No. 1-15403*
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(bb)
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First Business Bancshares of Kansas City, Inc. 1994 Key Employee Stock Option Plan, as amended on October 19, 2006, incorporated by reference to Old M&Is Annual Report on Form 10-K for
the year ended December 31, 2006, SEC File No. 1-15403*
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152
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(cc)
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American Bancshares, Inc. and American Bank of Bradenton Incentive Stock Option Plan of 1996, as amended on October 19, 2006, incorporated by reference to Old M&Is Annual Report on
Form 10-K for the year ended December 31, 2006, SEC File No. 1- 15403*
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(dd)
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American Bancshares, Inc. 1999 Stock Option and Equity Incentive Plan, as amended on October 19, 2006, incorporated by reference to Old M&Is Annual Report on Form 10-K for the year
ended December 31, 2006, SEC File No. 1-15403*
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(ee)
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Trustcorp Financial, Inc. 1997 Non-Qualified Stock Option Plan, as amended, incorporated by reference to Old M&Is Registration Statement on Form S-8 filed April 4, 2006, SEC File No.
333-132977*
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(ff)
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United Community Bankshares of Florida, Inc. Director Stock Option Plan, incorporated by reference to the United Community Bankshares of Florida, Inc. (n/k/a United Heritage Bankshares of
Florida, Inc.) Quarterly Report on Form 10-QSB for the quarter ended March 31, 2003, SEC File No. 000-50287*
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(gg)
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United Community Bankshares of Florida, Inc. Officers and Employees Stock Option Plan, incorporated by reference to the United Community Bankshares of Florida, Inc. (n/k/a United
Heritage Bankshares of Florida, Inc.) Quarterly Report on Form 10-QSB for the quarter ended March 31, 2003, SEC File No. 000-50287*
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(hh)
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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 Old M&Is Current Report on Form 8-K filed April 9, 2007, SEC File No. 1-15403
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(ii)
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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 Old M&Is Current Report on Form 8-K filed April 9, 2007, SEC File No. 1-15403
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(jj)
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Form of Shareholders Agreement, incorporated by reference to Old M&Is Current Report on Form 8-K filed April 9, 2007, SEC File No. 1-15403
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(kk)
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Form of Stock Purchase Right Agreement, incorporated by reference to Old M&Is Current Report on Form 8-K filed April 9, 2007, SEC File No. 1-15403
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(ll)
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Excel Bank Corporation 2005 Equity Incentive Plan, incorporated by reference to Old M&Is Registration Statement on Form S-3 filed July 5, 2007, SEC File No. 333-
144360*
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(mm)
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Amendment No. 1 to the Employee Matters Agreement, dated as of August 21, 2007, among M&I, Metavante Corporation, Metavante Holding Company and New M&I, incorporated by reference to Old
M&Is Current Report on Form 8-K filed September 5, 2007, SEC File No. 1-15403
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(nn)
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Assignment and Assumption Agreement dated January 1, 2007 relating to Mr. Furlongs Supplemental Executive Retirement Benefit, by and between M&I LLC, M&I and Mr. Furlong,
incorporated by reference to M&Is Annual Report on Form 10-K for the year ended December 31, 2007, SEC File No. 1-33488*
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(oo)
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Form of Change of Control Agreements dated January 1, 2008 between M&I and Messrs. Furlong, ONeill and Gregory A. Smith, incorporated by reference to M&Is Annual Report on
Form 10-K for the year ended December 31, 2007, SEC File No. 1-33488*
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(pp)
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Form of Change of Control Agreements dated January 1, 2008 between M&I and Messrs. Deneen, Ellis, Hogan, Kelly, Renard, Roberts, Root, Michael C. Smith and Ronald E. Smith and Ms.
Justiliano and Ms. Knickerbocker, incorporated by reference to M&Is Annual Report on Form 10-K for the year ended December 31, 2007, SEC File No. 1- 33488*
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(qq)
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Form of Change of Control Agreements dated December 18, 2008 between M&I and Messrs. Erickson and Krei, incorporated by reference to M&Is Current Report on Form 8-K filed December
23, 2008, SEC File No. 1-33488*
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(rr)
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Letter Agreement, dated November 14, 2008, between M&I and the U.S. Treasury, including the Securities Purchase Agreement attached thereto, incorporated by reference to M&Is
Current Report on Form 8-K filed November 14, 2008, SEC File No. 1-33488
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153
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(ss)
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Form of Omnibus Amendment Agreements dated November 11, 2008 between M&I and Mr. Furlong, Gregory A. Smith and Messrs. ONeill, Krei and Erickson, incorporated by reference to
M&Is Current Report on Form 8-K filed November 14, 2008, SEC File No. 1-33488*
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(11)
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Computation of Earnings Per Common Share, incorporated by reference to Note 4 of Notes to Consolidated Financial Statements included in Item 8, Consolidated Financial Statements and
Supplementary Data
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(12)
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Computation of Ratio of Earnings to Fixed Charges
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(14)
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Code of Business Conduct and Ethics, incorporated by reference to M&Is Annual Report on
Form 10-K for the fiscal year ended December 31, 2004, SEC File No. 1-15403
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(21)
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Subsidiaries
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(23)
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Consent of Deloitte & Touche LLP
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(24)
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Powers of Attorney
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(31)
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(a)
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Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended
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(b)
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Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended
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(32)
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(a)
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Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350
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(b)
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Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350
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The total amount of securities authorized pursuant to any instrument defining the rights of holders of long-term debt of M&I does not exceed 10% of the total assets of M&I
and its subsidiaries on a consolidated basis. M&I agrees to furnish to the Commission upon request a copy of any such instrument.
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*
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Management contract or compensatory plan or arrangement.
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154
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