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Marshall & Ilsley 10-Q 2008

Documents found in this filing:

  1. 10-Q
  2. Ex-12
  3. Ex-31.A
  4. Ex-31.B
  5. Ex-32.A
  6. Ex-32.B
  7.  
micorp10q_06-2008.htm
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-Q
          (Mark One)
[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2008
 
OR
[  ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from __________ to __________
 
Commission file number  1-33488
MARSHALL & ILSLEY CORPORATION
(Exact name of registrant as specified in its charter)
Wisconsin
20-8995389
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification No.)
770 North Water Street
Milwaukee, Wisconsin
53202
(Address of principal executive offices)
(Zip Code)
Registrant's telephone number, including area code:  (414) 765-7801
None
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.      Yes   [X]       No   [  ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer   [X]                                Accelerated filer    [  ] 
Non-accelerated filer      [  ] (Do not check if a smaller reporting company)        Small reporting company [  ]
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes   [  ]       No   [X]
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
 
Outstanding at
Class
July 31, 2008
Common Stock, $1.00 Par Value
259,438,331

 

 
PART I - FINANCIAL INFORMATION

ITEM 1.                      FINANCIAL STATEMENTS
 
MARSHALL & ILSLEY CORPORATION
 
CONSOLIDATED BALANCE SHEETS (Unaudited)
 
($000's except share data)
 
                   
   
June 30,
   
December 31,
   
June 30,
 
Assets
 
2008
   
2007
   
2007
 
Cash and cash equivalents:
                 
    Cash and due from banks
  $ 1,316,397     $ 1,368,919     $ 1,195,776  
    Federal funds sold and security resale agreements
    519,819       379,012       488,847  
    Money market funds
    67,084       74,581       34,305  
Total cash and cash equivalents
    1,903,300       1,822,512       1,718,928  
                         
Interest bearing deposits at other banks
    8,944       8,309       15,328  
                         
Trading assets, at fair value
    133,128       124,607       51,186  
                         
Investment securities:
                       
    Available for sale, at fair value
    7,412,592       7,442,889       7,082,474  
    Held to maturity, fair value $288,401
                       
        ($383,190 December 31, 2007 and $417,395 June 30, 2007)
    282,396       374,861       409,897  
Total investment securities
    7,694,988       7,817,750       7,492,371  
                         
Loan to Metavante
    -       -       982,000  
                         
Loans held for sale
    135,923       131,873       94,766  
                         
Loans and leases:
                       
Loans and leases, net of unearned income
    50,096,609       46,164,385       43,187,596  
    Allowance for loan and lease losses
    (1,028,809 )     (496,191 )     (431,012 )
Net loans and leases
    49,067,800       45,668,194       42,756,584  
                         
Premises and equipment, net
    524,284       469,879       456,324  
Goodwill and other intangibles
    2,241,813       1,807,961       1,745,313  
Accrued interest and other assets
    2,550,242       1,997,511       1,604,605  
Assets of discontinued operations
    -       -       1,380,324  
Total Assets
  $ 64,260,422     $ 59,848,596     $ 58,297,729  
                         
Liabilities and Shareholders' Equity
                       
Deposits:
                       
    Noninterest bearing
  $ 6,390,374     $ 6,174,281     $ 5,739,470  
    Interest bearing
    34,783,119       29,017,073       29,799,623  
Total deposits
    41,173,493       35,191,354       35,539,093  
                         
Federal funds purchased and security repurchase agreements
    2,175,217       2,262,355       1,568,202  
Other short-term borrowings
    4,423,067       6,214,027       6,603,553  
Accrued expenses and other liabilities
    971,804       940,725       921,199  
Long-term borrowings
    9,002,611       8,207,406       7,204,384  
Liabilities of discontinued operations
    -       -       23,034  
Total liabilities
    57,746,192       52,815,867       51,859,465  
                         
Shareholders' Equity:
                       
    Preferred stock, $1.00 par value; 5,000,000 shares authorized
    -       -       -  
    Common stock, $1.00 par value; 267,455,394 shares issued
                       
        (267,455,394 shares at December 31, 2007 and 266,824,323
                       
        shares at June 30, 2007)
    267,455       267,455       266,824  
    Additional paid-in capital
    2,062,289       2,059,273       2,006,226  
    Retained earnings
    4,513,019       4,923,008       4,671,559  
    Accumulated other comprehensive loss, net of related taxes
    (68,594 )     (53,707 )     (63,787 )
    Treasury stock, at cost: 8,023,398 shares
                       
        (3,968,651 December 31, 2007 and 9,711,618 June 30, 2007)
    (222,026 )     (117,941 )     (401,672 )
    Deferred compensation
    (37,913 )     (45,359 )     (40,886 )
Total shareholders' equity
    6,514,230       7,032,729       6,438,264  
Total Liabilities and Shareholders' Equity
  $ 64,260,422     $ 59,848,596     $ 58,297,729  
                         
See notes to financial statements.
                       
 
2

 
MARSHALL & ILSLEY CORPORATION
 
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
 
($000's except per share data)
 
   
Three Months Ended June 30,
 
   
2008
   
2007
 
Interest and fee income
           
    Loans and leases
  $ 726,621     $ 803,758  
    Investment securities:
               
        Taxable
    71,697       78,680  
        Exempt from federal income taxes
    13,733       14,959  
    Trading securities
    386       336  
    Short-term investments
    2,171       3,437  
    Loan to Metavante
    -       10,791  
Total interest and fee income
    814,608       911,961  
                 
Interest expense
               
    Deposits
    219,205       305,935  
    Short-term borrowings
    37,972       56,018  
    Long-term borrowings
    109,793       150,272  
Total interest expense
    366,970       512,225  
                 
Net interest income
    447,638       399,736  
Provision for loan and lease losses
    885,981       26,026  
Net interest (loss) income after provision for loan and lease losses
    (438,343 )     373,710  
                 
Other income
               
    Wealth management
    74,753       65,580  
    Service charges on deposits
    37,898       30,104  
    Gains on sale of mortgage loans
    5,614       10,367  
    Other mortgage banking revenue
    1,010       1,610  
    Net investment securities gains
    452       19,455  
    Life insurance revenue
    11,968       7,997  
    Other
    55,302       51,452  
Total other income
    186,997       186,565  
                 
Other expense
               
    Salaries and employee benefits
    186,572       168,876  
    Net occupancy
    21,160       17,972  
    Equipment
    10,093       10,149  
    Software expenses
    6,349       4,691  
    Processing charges
    33,705       33,232  
    Supplies and printing
    4,134       3,471  
    Professional services
    18,168       9,287  
    Shipping and handling
    7,418       7,418  
    Amortization of intangibles
    5,977       5,182  
    Other real estate owned (OREO) expenses
    20,263       1,560  
    Other
    66,556       32,496  
Total other expense
    380,395       294,334  
                 
(Loss) income before income taxes
    (631,741 )     265,941  
(Benefit) provision for income taxes
    (237,950 )     87,064  
(Loss) income from continuing operations
    (393,791 )     178,877  
Income from discontinued operations, net of tax
    -       41,412  
Net (loss) income
  $ (393,791 )   $ 220,289  
                 
Net (loss) income per common share
               
Basic
               
    Continuing operations
  $ (1.52 )   $ 0.69  
    Discontinued operations
    -       0.16  
            Net (loss) income
  $ (1.52 )   $ 0.85  
                 
Diluted
               
    Continuing operations
  $ (1.52 )   $ 0.68  
    Discontinued operations
    -       0.15  
            Net (loss) income
  $ (1.52 )   $ 0.83  
                 
Dividends paid per common share
  $ 0.32     $ 0.31  
                 
Weighted average common shares outstanding (000's) :
               
    Basic
    258,592       258,772  
    Diluted
    258,592       264,840  
                 
See notes to financial statements.
               
 
3

 
MARSHALL & ILSLEY CORPORATION
 
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
 
($000's except per share data)
 
   
Six Months Ended June 30,
 
   
2008
   
2007
 
Interest and fee income
           
    Loans and leases
  $ 1,510,149     $ 1,586,910  
    Investment securities:
               
        Taxable
    149,253       155,734  
        Exempt from federal income taxes
    28,136       29,820  
    Trading securities
    993       469  
    Short-term investments
    5,087       6,962  
    Loan to Metavante
    -       21,582  
Total interest and fee income
    1,693,618       1,801,477  
                 
Interest expense
               
    Deposits
    491,979       602,338  
    Short-term borrowings
    91,562       110,901  
    Long-term borrowings
    232,055       294,019  
Total interest expense
    815,596       1,007,258  
                 
Net interest income
    878,022       794,219  
Provision for loan and lease losses
    1,032,302       43,174  
Net interest (loss) income after provision for loan and lease losses
    (154,280 )     751,045  
                 
Other income
               
    Wealth management
    146,639       126,286  
    Service charges on deposits
    73,579       57,767  
    Gains on sale of mortgage loans
    14,066       19,160  
    Other mortgage banking revenue
    1,922       2,957  
    Net investment securities gains
    26,168       21,039  
    Life insurance revenue
    24,363       15,517  
    Other
    111,493       99,389  
Total other income
    398,230       342,115  
                 
Other expense
               
    Salaries and employee benefits
    361,236       319,101  
    Net occupancy
    42,806       35,756  
    Equipment
    19,649       19,759  
    Software expenses
    12,582       9,700  
    Processing charges
    65,790       65,078  
    Supplies and printing
    7,712       7,092  
    Professional services
    31,647       17,474  
    Shipping and handling
    15,608       14,329  
    Amortization of intangibles
    11,922       9,684  
    Loss on termination of debt
    -       9,478  
    Other real estate owned (OREO) expenses
    35,212       3,100  
    Other
    92,018       64,823  
Total other expense
    696,182       575,374  
                 
(Loss) income before income taxes
    (452,232 )     517,786  
(Benefit) provision for income taxes
    (204,650 )     170,128  
(Loss) income from continuing operations
    (247,582 )     347,658  
Income from discontinued operations, net of tax
    -       89,393  
Net (loss) income
  $ (247,582 )   $ 437,051  
                 
Net (loss) income per common share
               
Basic
               
    Continuing operations
  $ (0.95 )   $ 1.35  
    Discontinued operations
    -       0.35  
            Net (loss) income
  $ (0.95 )   $ 1.70  
                 
Diluted
               
    Continuing operations
  $ (0.95 )   $ 1.32  
    Discontinued operations
    -       0.34  
            Net (loss) income
  $ (0.95 )   $ 1.66  
                 
Dividends paid per common share
  $ 0.63     $ 0.58  
                 
Weighted average common shares outstanding (000's) :
               
    Basic
    259,282       257,142  
    Diluted
    259,282       263,066  
                 
See notes to financial statements.
               
 
4

 
MARSHALL & ILSLEY CORPORATION
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
 
($000's)
 
             
   
Six Months Ended June 30,
 
   
2008
   
2007
 
Net Cash Provided by Operating Activities
  $ 388,136     $ 513,335  
                 
Cash Flows From Investing Activities:
               
    Proceeds from sales of securities available for sale
    118,799       134,789  
    Proceeds from sales of securities held to maturity
    1,633       -  
    Proceeds from maturities of securities available for sale
    701,106       623,171  
    Proceeds from maturities of securities held to maturity
    91,794       86,207  
    Purchases of securities available for sale
    (591,555 )     (780,104 )
    Net increase in loans
    (3,080,240 )     (1,084,816 )
    Purchases of assets to be leased
    (86,249 )     (152,370 )
    Principal payments on lease receivables
    125,269       184,692  
    Purchases of premises and equipment, net
    (41,626 )     (45,015 )
    Acquisitions, net of cash and cash equivalents (paid) acquired
    (476,625 )     61,355  
    Proceeds from divestitures
    2,485       -  
    Proceeds from sale of OREO
    41,677       12,582  
Net cash used in investing activities
    (3,193,532 )     (959,509 )
                 
Cash Flows From Financing Activities:
               
    Net increase in deposits
    4,387,544       202,603  
    Proceeds from issuance of commercial paper
    31,947,341       3,893,282  
    Principal payments on commercial paper
    (32,101,676 )     (3,669,916 )
    Net decrease in other short-term borrowings
    (722,575 )     (595,969 )
    Proceeds from issuance of long-term borrowings
    809,389       2,197,615  
    Payments of long-term borrowings
    (1,155,118 )     (915,469 )
    Dividends paid
    (162,406 )     (149,133 )
    Purchases of common stock
    (130,870 )     (294,758 )
    Proceeds from issuance of common stock
    14,555       67,278  
    Other
    -       (5,200 )
Net cash provided by financing activities
    2,886,184       730,333  
Net increase in cash and cash equivalents
    80,788       284,159  
Cash and cash equivalents, beginning of year
    1,822,512       1,485,258  
Cash and cash equivalents, end of period
    1,903,300       1,769,417  
Cash and cash equivalents of discontinued operations
    -       (50,489 )
Cash and cash equivalents from continuing operations, end of period
  $ 1,903,300     $ 1,718,928  
                 
Supplemental cash flow information:
               
    Cash paid during the period for:
               
        Interest
  $ 826,763     $ 966,281  
        Income taxes
    84,436       156,337  
                 
See notes to financial statements.
               
 
5

MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements
June 30, 2008 & 2007 (Unaudited)
 



1.  
Basis of Presentation

 
The accompanying unaudited consolidated financial statements should be read in conjunction with Marshall & Ilsley Corporation’s Annual Report on Form 10-K for the year ended December 31, 2007.  In management’s opinion, the unaudited financial information included in this report reflects all adjustments consisting of normal recurring accruals which are necessary for a fair statement of the financial position and results of operations as of and for the three and six months ended June 30, 2008 and 2007.  The results of operations for the three and six months ended June 30, 2008 and 2007 are not necessarily indicative of results to be expected for the entire year.


2.     Discontinued Operations

 
On November 1, 2007, old Marshall & Ilsley Corporation, the Accounting Predecessor to new Marshall & Ilsley Corporation (which is referred to as “M&I” or the “Corporation”) and its wholly owned subsidiary, Metavante Corporation (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 believes this transaction, which the Corporation refers to as the “Separation,” will provide substantial benefits to the shareholders of both companies by creating additional opportunities to focus on their core businesses.  The Corporation’s enhanced capital position post-Separation is expected to be a source of strength in the current credit environment and to drive earnings per share growth by enabling it to provide resources for continued organic growth, fund strategic initiatives within its business lines and pursue opportunities in new geographic markets.

 
As a result of the Separation, the assets, liabilities and net income of Metavante have been de-consolidated from the Corporation’s historical consolidated financial statements and are now reported as discontinued operations.  For the three and six months ended June 30, 2007, discontinued operations in the Consolidated Statements of Income also includes the expenses attributable to the Separation transaction.  The assets and liabilities reported as discontinued operations as of June 30, 2007 do not directly reconcile to historical consolidated assets and liabilities reported by Metavante.  The amounts reported as assets or liabilities of discontinued operations include adjustments for intercompany cash and deposits, receivables and payables, intercompany debt and reclassifications that were required to de-consolidate the financial information of the two companies.


6

MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
June 30, 2008 & 2007 (Unaudited)

 
The components of the assets and liabilities of discontinued operations as of June 30, 2007 were as follows ($000’s):
 
   
June 30, 2007
 
       
Assets
     
Cash and cash equivalents
  $ 50,489  
Interest bearing deposits at other banks
    2,269  
Investment securities
       
Available for sale, at fair value
    82,948  
Loan to Metavante
    (982,000 )
Loans and leases
    3,242  
Premises and equipment, net
    130,142  
Goodwill and other intangibles
    1,673,255  
Accrued interest and other assets
    419,979  
Total assets
  $ 1,380,324  
         
Liabilities
       
Deposits:
       
Noninterest bearing
  $ (21,498 )
Interest bearing
    (529,311 )
Total deposits
    (550,809 )
Short-term borrowings
    232  
Accrued expenses and other liabilities
    573,580  
Long-term borrowings
    31  
Total liabilities
  $ 23,034  
         
 
 
Prior to November 1, 2007, intercompany transactions between Metavante and old Marshall & Ilsley Corporation (which was re-named M&I LLC in connection with the Separation) and its affiliates were eliminated in the Corporation’s consolidated financial statements.  The above table reflects the reclassification of Metavante’s intercompany borrowing from M&I LLC to “Loan to Metavante”.  On November 1, 2007, the Corporation received $982 million of cash from Metavante to retire this indebtedness.  The “Noninterest bearing” and “Interest bearing deposits” in the above table reflects the reclassification of Metavante’s cash and investments held as deposits at the Corporation’s affiliate banks.

 
The results of discontinued operations for the three and six months ended June 30, 2007 consisted of the following ($000’s):
 
   
Three Months
   
Six Months
 
   
Ended
   
Ended
 
   
June 30, 2007
   
June 30, 2007
 
             
Metavante income before provision for income taxes
  $ 66,045     $ 143,006  
Separation transaction expenses and other related costs
    (1,660 )     (3,125 )
Income before income taxes
    64,385       139,881  
Provision for income taxes
    22,973       50,488  
Income from discontinued operations, net of tax
  $ 41,412     $ 89,393  
                 
 
 
As permitted under U.S. generally accepted accounting principles, the Corporation has elected not to adjust the Consolidated Statements of Cash Flows for the six months ended June 30, 2007 to exclude cash flows attributable to discontinued operations.

 
Included in Acquisitions, net of cash and cash equivalents acquired in the Corporation’s Consolidated Statements of Cash Flows for the six months ended June 30, 2007 are Metavante’s acquisitions, which are now part of discontinued operations.  The total cash consideration associated with Metavante’s acquisitions amounted to $41.0 million for the six months ended June 30, 2007.
 
7

MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
June 30, 2008 & 2007 (Unaudited)
 
3.
New Accounting Pronouncements

 
In June 2008, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position (“FSP”) No. EITF 03-6-1 (“FSP EITF 03-6-1”), Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities.  Under FSP EITF 03-6-1, unvested share-based payment awards that provide nonforfeitable rights to dividends are considered participating securities to be included in the computation of earnings per share pursuant to the two-class method described in FASB Statement No. 128, Earnings per Share.  FSP EITF 03-6-1 is effective for the Corporation on January 1, 2009.  Once effective, all prior-period earnings per share data presented must be adjusted retrospectively to conform with the provisions of the FSP. Early application is not permitted.  The Corporation is currently evaluating the impact of adopting FSP EITF 03-6-1, but does not expect it to have a significant impact on its financial statements and related disclosures.

 
In May 2008, the FASB issued Statement of Financial Accounting Standards No. 162, The Hierarchy of Generally Accepted Accounting Principles  (“SFAS 162”).  SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles (GAAP) in the United States.  SFAS 162 will be effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board’s amendments to AU Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles.  The Corporation does not expect that SFAS 162 will result in a change in current practice.

 
In April 2008, the FASB issued FSP No. FAS 142-3, Determination of the Useful Life of Intangible Assets (“FSP FAS 142-3”).  FSP FAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset and provides for enhanced disclosures regarding intangible assets.  The intent of this FSP is to improve the consistency between the useful life of a recognized intangible asset and the period of expected cash flows used to measure the fair value of the asset.  The disclosure provisions are effective as of the adoption date and the guidance for determining the useful life applies prospectively to all intangible assets acquired after the effective date.  Early adoption is prohibited.  The Corporation is evaluating this guidance but does not expect it to have a significant impact on its financial statements and related disclosures.

 
In March 2008, FASB issued Statement of Financial Accounting Standards No. 161, Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No.133 (“SFAS 161”).  SFAS 161 applies to all derivative instruments and related hedged items accounted for under FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities (“SFAS 133”).  SFAS 161 amends and expands the disclosures provided under SFAS 133 regarding how and why an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for under SFAS 133 and its related interpretations, and how derivative instruments and related hedged items affect an entity’s financial position, results of operations, and cash flows.  SFAS 161 is effective for the Corporation on January 1, 2009.

4.
Fair Value Measurement

On January 1, 2008 the Corporation adopted, except as discussed below, Statement of Financial Accounting Standard No. 157,Fair Value Measurements> (“SFAS 157”).  SFAS 157 provides enhanced guidance for using fair value to measure assets and liabilities.  The standard generally applies whenever other standards require or permit assets or liabilities to be measured at fair value.  Under the standard, fair value refers to the price at the measurement date that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in which the reporting entity is engaged.  The standard does not expand the use of fair value in any new circumstances.  As permitted, adoption of SFAS 157 has been delayed for certain nonfinancial assets and nonfinancial liabilities to January 1, 2009.

 
All changes resulting from the application of SFAS 157 were applied prospectively with the effect of adoption recognized in either earnings or other comprehensive income depending on the applicable accounting requirements for the particular asset or liability being measured.
 
8

MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
June 30, 2008 & 2007 (Unaudited)
 
 
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 1- Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

 
Level 2- Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.  Fair values for these instruments are estimated using pricing models, quoted prices of securities with similar characteristics, or discounted cash flows.

 
Level 3- Inputs to the valuation methodology are unobservable and significant to the fair value measurement.  Fair values are initially valued based upon transaction price and are adjusted to reflect exit values as evidenced by financing and sale transactions with third parties.

 
Determination of Fair Value

 
Following is a description of the valuation methodologies used for instruments measured at fair value on a recurring basis, as well as the general classification of such instruments pursuant to the valuation hierarchy.

 
Trading Assets and Investment Securities

 
When available, the Corporation uses quoted market prices to determine the fair value of trading assets and investment securities; such items are classified in Level 1 of the fair value hierarchy.

 
For the Corporation’s investments in government agencies, mortgage-backed securities and obligations of states and political subdivisions where quoted prices are not available in an active market, the Corporation generally determines fair value utilizing vendors who apply matrix pricing for similar bonds where no price is observable or may compile prices from various sources.  These models are primarily industry-standard models that consider various assumptions, including time value, yield curve, volatility factors, prepayment speeds, default rates, loss severity, current market and contractual prices for the underlying financial instruments, as well as other relevant economic measures.  Substantially all of these assumptions are observable in the marketplace, can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace.  Fair values from these models are verified, where possible, to quoted prices for recent trading activity of assets with similar characteristics to the security being valued.  Such methods are generally classified as Level 2.  However, when prices from independent sources vary, cannot be obtained or cannot be corroborated a security is generally classified as Level 3.

 
The Corporation’s Capital Markets Group investments generally take the form of investments in private equity funds.  The private equity investments are valued using the valuations and financial statements provided by the general partners on a quarterly basis.  The transaction price is used as the best estimate of fair value at inception.  When evidence supports a change to the carrying value from the transaction price, adjustments are made to reflect expected exit values.  These nonpublic investments are included in Level 3 of the fair value hierarchy because they trade infrequently, and, therefore, the fair value is unobservable.

 
Estimated fair values for residual interests in the form of interest only strips from automobile loan securitizations are based on discounted cash flow analysis and are classified as a Level 3.

 
Derivative Financial Instruments

 
Fair values for exchange-traded contracts are based on quoted prices and are classified as Level 1.  Fair values for over-the-counter interest rate contracts are provided either by third-party dealers in the contracts or by quotes provided by the Corporation’s independent pricing services.  The significant inputs, including the LIBOR curve and measures of volatility, used by these third-party dealers or independent pricing services to determine fair values are considered Level 2, observable market inputs.
 
9

MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
June 30, 2008 & 2007 (Unaudited)
 
 
Certain derivative transactions are executed with counterparties who are large financial institutions (“dealers”). These derivative transactions primarily consist of interest rate swaps that were used for fair value hedges, cash flow hedges and economic hedges of interest rate swaps executed with the Corporation’s customers at June 30, 2008.  The Corporation and its subsidiaries maintain risk management policies and procedures to monitor and limit exposure to credit risk to derivative transactions with dealers.  Approved dealers for these transactions must have and maintain an investment grade rating on long-term senior debt from at least two nationally recognized statistical rating organizations or have a guarantor with an acceptable rating from such organizations. International Swaps and Derivative Association Master Agreements (“ISDA”) and Credit Support Annexes (“CSA”) are employed for all contracts with dealers.  These agreements contain bilateral collateral arrangements. Notwithstanding its policies and procedures, the Corporation recognizes that unprecedented events could result in counterparty failure.  The Corporation also recognizes that there could be additional credit exposure due to certain industry conventions established for operational efficiencies.  The Corporation qualitatively determined the impact of these factors to be insignificant and did not make any additional credit risk adjustments for purposes of determining the fair value of its derivative assets with dealers as counterparties at June 30, 2008.

 
Certain derivative transactions are executed with customers whose counterparty credit risk is similar in nature to the credit risk associated with the Corporation’s lending activities.  As is the case with a loan, the Corporation evaluates the credit risk of each of these customers on an individual basis and, where deemed appropriate collateral is obtained.  The type of collateral varies and is often the same collateral as the collateral obtained to secure a customer’s loan.  For purposes of assessing the potential impact of counterparty credit risk on the fair values of derivative assets with customers, the Corporation used a probability analysis to estimate the amount of expected loss exposure due to customer default at some point in the remaining term of the entire portfolio of customer derivative contracts outstanding at June 30, 2008.  While not significant, the Corporation did factor in the estimated amount of expected loss due to customer default into the reported fair value of its customer derivative assets at June 30, 2008.

 
The Corporation and its subsidiaries maintain an investment grade rating on long-term debt from at least two nationally recognized statistical rating organizations. In addition, certain derivative contracts are subject to bilateral collateral arrangements.  The Corporation believes that the credit risk implied by the LIBOR swap curve is representative of its own counterparty credit risk.  Therefore, no other credit risk adjustments were used by the Corporation for purposes of determining the fair value of its derivative liabilities at June 30, 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 June 30, 2008 ($000’s):
 
   
Quoted Prices in
 
Significant Other
 
Significant
 
   
Active Markets for
 
Observable
 
Unobservable
 
   
Identical Assets
 
Inputs
 
Inputs
 
   
(Level 1)
 
(Level 2)
 
(Level 3)
 
Assets (1)
 
Trading assets:
 
Trading securities
  $ -     $ 38,119     $ -  
Derivative assets
    303       94,706       -  
Total trading assets
  $ 303     $ 132,825     $ -  
                         
Investment securities available for sale (2):
 
Investment securities
  $ -     $ 6,905,554     $ 72,391  
Private equity investments
    -       -       61,559  
Other
    -       -       6,196  
Total investment securities available for sale
  $ -     $ 6,905,554     $ 140,146  
                         
Liabilities (1)
 
Other short-term borrowings
  $ -     $ 6,394     $ -  
Accrued expenses and other liabilities:
 
Derivative liabilities
  $ 40     $ 72,082     $ -  
 
 (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 14 in Notes to Financial Statements.

 (2)
The amounts presented above are exclusive of $327.8 million of investments in Federal Reserve Bank and FHLB stock, which are bought and sold at par and are carried at cost; $39.1 million in affordable housing partnerships, which are generally carried on the equity method; and other non-marketable equity investments carried at cost.
 
10

MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
June 30, 2008 & 2007 (Unaudited)
 
 
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 six months ended June 30, 2008 ($000’s):
 
   
Investment
 
Private equity
   
 
 
   
securities (1)
 
investments (2)
 
Other
 
Total
 
Balance at January 1, 2008
  $ 2,066     $ 54,121     $ 9,030     $ 65,217  
Net payments, purchases and sales
    14,324       2,682       (768 )     16,238  
Net transfers in and/or out of Level 3
    -       -       -       -  
Total gains or losses (realized or unrealized):
 
     Included in earnings
    -       1,051       (2,020 )     (969 )
     Included in other comprehensive income
    -       -       (29 )     (29 )
Balance at March 31, 2008
  $ 16,390     $ 57,854     $ 6,213     $ 80,457  
Net payments, purchases and sales
    (6 )     3,092       (782 )     2,304  
Net transfers in and/or out of Level 3
    56,007       -       -       56,007  
Total gains or losses (realized or unrealized):
 
     Included in earnings
    -       613       -       613  
     Included in other comprehensive income
    -       -       765       765  
Balance at June 30, 2008
  $ 72,391     $ 61,559     $ 6,196     $ 140,146  
                                 
Unrealized gains or losses for the period included in earnings attributable to unrealized gains or losses for assets still held at June 30, 2008
  $ -     $ 293     $ (2,020 )   $ (1,727 )
 
 (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.

 
For purposes of impairment testing, nonaccrual loans greater than an established threshold are individually evaluated for impairment.  Substantially all of these loans are collateral dependent. A valuation allowance is recorded for the excess of the loan’s recorded investment over the fair value of the collateral less estimated selling costs.  This valuation allowance is a component of the Allowance for loan and lease losses.  The Corporation generally obtains appraisals to support the fair value of collateral underlying loans subject to this impairment review.  Appraisals incorporate measures such as recent sales prices for comparable properties and costs of construction.  The Corporation considers these fair values Level 3.  For those loans individually evaluated for impairment, a valuation allowance of $18.1 million was recorded for loans with a recorded investment of $315.6 million at June 30, 2008.  See discussion of Allowance for Loan and Lease Losses in Critical Accounting Policies.
 
5.
Fair Value Option

 
On January 1, 2008 the Corporation adopted Statement of Financial Accounting Standard No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, Including an Amendment of FASB Statement No. 115 (“SFAS 159”).  SFAS 159 permits entities to choose to measure many financial instruments and certain other items generally on an instrument-by-instrument basis at fair value that are not currently required to be measured at fair value.  SFAS 159 is intended to provide entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions.  SFAS 159 does not change requirements for recognizing and measuring dividend income, interest income, or interest expense.  The Corporation did not elect to measure any existing financial instruments at fair value at January 1, 2008.  However, the Corporation may elect to measure newly acquired financial instruments at fair value in the future.
 
 
11

MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
June 30, 2008 & 2007 (Unaudited)
 
6.
Comprehensive Income

 
The following tables present the Corporation’s comprehensive income ($000’s):
 
   
Three Months Ended June 30, 2008
 
   
Before-Tax
 
Tax (Expense)
 
Net-of-Tax
 
   
Amount
 
Benefit
 
Amount
 
Net loss
              $ (393,791 )
                     
Other comprehensive income (loss):
 
Unrealized gains (losses) on available for sale investment securities:
 
Arising during the period
  $ (62,728 )   $ 22,249     $ (40,479 )
Reclassification for securities transactions included in net income
    (39 )     14       (25 )
Total unrealized gains (losses) on available for sale investment securities
  $ (62,767 )   $ 22,263     $ (40,504 )
                         
Net gains (losses) on derivatives hedging variability of cash flows:
 
Arising during the period
  $ 48,984     $ (17,144 )   $ 31,840  
Reclassification adjustments for hedging activities included in net income
    12,247       (4,287 )     7,960  
Total net gains (losses) on derivatives hedging variability of cash flows
  $ 61,231     $ (21,431 )   $ 39,800  
                         
Unrealized gains (losses) on funded status of defined benefit postretirement plan:
 
Arising during the period
  $ -     $ -     $ -  
Reclassification for amortization of actuarial loss and prior service credit amortization included in net income
    (528 )     196       (332 )
Total unrealized gains (losses) on funded status of defined benefit postretirement plan
  $ (528 )   $ 196     $ (332 )
Other comprehensive income (loss)
    (1,036 )
Total comprehensive income (loss)
  $ (394,827 )
                         
                         
                         
   
Three Months Ended June 30, 2007
 
   
Before-Tax
 
Tax (Expense)
 
Net-of-Tax
 
   
Amount
 
Benefit
 
Amount
 
Net income
    $ 220,289  
                         
Other comprehensive income (loss):
 
Unrealized gains (losses) on available for sale investment securities:
 
Arising during the period
  $ (105,746 )   $ 37,055     $ (68,691 )
Reclassification for securities transactions included in net income
    (390 )     137       (253 )
Total unrealized gains (losses) on available for sale investment securities
  $ (106,136 )   $ 37,192     $ (68,944 )
                         
Net gains (losses) on derivatives hedging variability of cash flows:
 
Arising during the period
  $ 36,498     $ (12,774 )   $ 23,724  
Reclassification adjustments for hedging activities included in net income
    (5,288 )     1,851       (3,437 )
Total net gains (losses) on derivatives hedging variability of cash flows
  $ 31,210     $ (10,923 )   $ 20,287  
                         
Unrealized gains (losses) on funded status of defined benefit postretirement plan:
 
Arising during the period
  $ -     $ -     $ -  
Reclassification for amortization of actuarial loss and prior service credit amortization included in net income
    (559 )     207       (352 )
Total unrealized gains (losses) on funded status of defined benefit postretirement plan
  $ (559 )   $ 207     $ (352 )
Other comprehensive income (loss)
    (49,009 )
Total comprehensive income
  $ 171,280  
                         
 
 
12

MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
June 30, 2008 & 2007 (Unaudited)
 
   
Six Months Ended June 30, 2008
 
   
Before-Tax
 
Tax (Expense)
 
Net-of-Tax
 
   
Amount
 
Benefit
 
Amount
 
Net loss
              $ (247,582 )
                     
Other comprehensive income (loss):
 
Unrealized gains (losses) on available for sale investment securities:
 
Arising during the period
  $ (31,532 )   $ 11,016     $ (20,516 )
Reclassification for securities transactions included in net income
    (133 )     47       (86 )
Total unrealized gains (losses) on available for sale investment securities
  $ (31,665 )   $ 11,063     $ (20,602 )
                         
Net gains (losses) on derivatives hedging variability of cash flows:
 
Arising during the period
  $ (8,163 )   $ 2,857     $ (5,306 )
Reclassification adjustments for hedging activities included in net income
    17,977       (6,292 )     11,685  
Total net gains (losses) on derivatives hedging variability of cash flows
  $ 9,814     $ (3,435 )   $ 6,379  
                         
Unrealized gains (losses) on funded status of defined benefit postretirement plan:
 
Arising during the period
  $ -     $ -     $ -  
Reclassification for amortization of actuarial loss and prior service credit amortization included in net income
    (1,056 )     392       (664 )
Total unrealized gains (losses) on funded status of defined benefit postretirement plan
  $ (1,056 )   $ 392     $ (664 )
Other comprehensive income (loss)
    (14,887 )
Total comprehensive income (loss)
  $ (262,469 )
                         
                         
                         
   
Six Months Ended June 30, 2007
 
   
Before-Tax
 
Tax (Expense)
 
Net-of-Tax
 
   
Amount
 
Benefit
 
Amount
 
Net income
    $ 437,051  
                         
Other comprehensive income (loss):
 
Unrealized gains (losses) on available for sale investment securities:
 
Arising during the period
  $ (88,094 )   $ 30,808     $ (57,286 )
Reclassification for securities transactions included in net income
    (1,005 )     352       (653 )
Total unrealized gains (losses) on available for sale investment securities
  $ (89,099 )   $ 31,160     $ (57,939 )
                         
Net gains (losses) on derivatives hedging variability of cash flows:
 
Arising during the period
  $ 30,316     $ (10,611 )   $ 19,705  
Reclassification adjustments for hedging activities included in net income
    (11,236 )     3,933       (7,303 )
Total net gains (losses) on derivatives hedging variability of cash flows
  $ 19,080     $ (6,678 )   $ 12,402  
                         
Unrealized gains (losses) on funded status of defined benefit postretirement plan:
 
Arising during the period
  $ -     $ -     $ -  
Reclassification for amortization of actuarial loss and prior service credit amortization included in net income
    (1,118 )     414       (704 )
Total unrealized gains (losses) on funded status of defined benefit postretirement plan
  $ (1,118 )   $ 414     $ (704 )
Other comprehensive income (loss)
    (46,241 )
Total comprehensive income
  $ 390,810  
                         
 
13

MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
June 30, 2008 & 2007 (Unaudited)
 
7.
Earnings Per Share

 
A reconciliation of the numerators and denominators of the basic and diluted per share computations are as follows (dollars and shares in thousands, except per share data):
 
   
Three Months Ended June 30, 2008
 
   
Income
   
Average Shares
   
Per Share
 
   
(Numerator)
   
(Denominator)
   
Amount
 
Basic earnings per share:
                 
Loss from continuing operations
  $ (393,791 )         $ (1.52 )
Income from discontinued operations
    -             -  
Net loss
  $ (393,791 )     258,592     $ (1.52 )
                         
Effect of dilutive securities:
                       
Stock option, restricted stock and other plans
            -          
                         
Diluted earnings per share:
                       
Loss from continuing operations
  $ (393,791 )           $ (1.52 )
Income from discontinued operations
    -               -  
Net loss
  $ (393,791 )     258,592     $ (1.52 )
                         
   
Three Months Ended June 30, 2007
 
   
Income
   
Average Shares
   
Per Share
 
   
(Numerator)
   
(Denominator)
   
Amount
 
Basic earnings per share:
                       
Income from continuing operations available to common shareholders
  $ 178,877             $ 0.69  
Income from discontinued operations
    41,412               0.16  
Net income available to common shareholders
  $ 220,289       258,772     $ 0.85  
                         
Effect of dilutive securities:
                       
Stock option, restricted stock and other plans
            6,068          
                         
Diluted earnings per share:
                       
Income from continuing operations available to common shareholders
  $ 178,877             $ 0.68  
Income from discontinued operations
    41,412               0.15  
Net income available to common shareholders
  $ 220,289       264,840     $ 0.83  
                         
 
   
Six Months Ended June 30, 2008
 
   
Income