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Marshall & Ilsley 10-Q 2010
micorp10q_03-2010.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 March 31, 2010
 
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 has submitted electronically and posted on its Corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files).      Yes   [  ]       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.
   
Class
Outstanding at April 30, 2010
Common Stock, $1.00 Par Value
527,244,964
   
 
 
 
 
 

 
 
MARSHALL & ILSLEY CORPORATION
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2010

 
 
PART I. FINANCIAL INFORMATION
Page
   
40
   
PART II. OTHER INFORMATION
 
   
   
   

 
PART I - FINANCIAL INFORMATION



   
March 31,
   
December 31,
   
March 31,
 
   
2010
   
2009
   
2009
 
Assets:
                 
Cash and cash equivalents:
                 
Cash and due from banks
  $ 588,687     $ 769,034     $ 744,861  
Federal funds sold and security resale agreements
    27,057       26,839       49,698  
Money market funds
    55,434       36,610       285,307  
Total cash and cash equivalents
    671,178       832,483       1,079,866  
Interest bearing deposits at other banks
    1,939,006       1,128,794       116,353  
Trading assets, at fair value
    254,549       255,646       686,723  
Investment securities:
                       
Available for sale, at fair value
    7,520,465       7,073,592       7,540,076  
Held to maturity, fair value $107,319 ($106,962 at December 31, 2009 and $192,324 at March 31, 2009)
    104,245       103,566       187,551  
Loans held for sale
    174,103       214,159       305,082  
                         
Loans and leases
    42,474,704       44,003,467       48,939,572  
Allowance for loan and lease losses
    (1,515,154 )     (1,480,470 )     (1,352,117 )
Net loans and leases
    40,959,550       42,522,997       47,587,455  
Premises and equipment, net
    557,650       565,806       570,303  
Goodwill
    609,517       609,517       607,954  
Other intangible assets
    129,064       134,067       150,154  
Bank-owned life insurance
    1,200,130       1,189,360       1,165,887  
Other real estate owned (OREO)
    454,317       430,821       344,271  
Accrued interest and other assets
    1,995,595       2,149,170       1,448,357  
Total Assets
  $ 56,569,369     $ 57,209,978     $ 61,790,032  
                         
Liabilities and Equity:
                       
Deposits:
                       
Noninterest bearing
  $ 7,787,831     $ 7,832,752     $ 6,988,312  
Interest bearing
    34,194,419       33,804,773       32,576,052  
Total deposits
    41,982,250       41,637,525       39,564,364  
Federal funds purchased and security repurchase agreements
    829,665       520,905       2,513,039  
Other short-term borrowings
    64,348       599,242       2,823,244  
Accrued expenses and other liabilities
    957,329       1,040,860       1,100,063  
Long-term borrowings
    5,865,381       6,425,855       9,538,664  
Total Liabilities
    49,698,973       50,224,387       55,539,374  
                         
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       1,715       1,715  
Common Stock, $1.00 par value;  530,164,081 shares issued (530,164,081 shares at December 31, 2009 and 272,318,615 shares at March 31, 2009)
    530,164       530,164       272,319  
Additional paid-in capital
    4,959,570       4,997,606       3,841,725  
Retained earnings
    1,520,214       1,666,021       2,419,433  
Treasury stock, at cost:  3,029,908 shares (4,793,885 shares at December 31, 2009 and 6,617,041 shares at March 31, 2009)
    (81,122 )     (132,191 )     (182,840 )
Deferred compensation
    (37,751 )     (37,538 )     (36,533 )
Accumulated other comprehensive income, net of related taxes
    (33,730 )     (51,321 )     (75,606 )
Total Marshall & Ilsley Corporation shareholders' equity
    6,859,060       6,974,456       6,240,213  
Noncontrolling interest in subsidiaries
    11,336       11,135       10,445  
Total Equity
    6,870,396       6,985,591       6,250,658  
Total Liabilities and Equity
  $ 56,569,369     $ 57,209,978     $ 61,790,032  
                         
See notes to financial statements.
                       
 
 
 

   
Three Months Ended March 31,
 
   
2010
   
2009
 
Interest and fee income
           
Loans and leases
  $ 509,573     $ 566,334  
Investment securities:
               
Taxable
    49,370       63,117  
Exempt from federal income taxes
    9,386       12,255  
Trading securities
    183       1,449  
Short-term investments
    1,086       628  
Total interest and fee income
    569,598       643,783  
Interest expense
               
Deposits
    112,564       138,089  
Short-term borrowings
    677       3,992  
Long-term borrowings
    52,892       99,956  
Total interest expense
    166,133       242,037  
Net interest income
    403,465       401,746  
Provision for loan and lease losses
    458,112       477,924  
Net interest income (loss) after provision for loan and lease losses
    (54,647 )     (76,178 )
Other income
               
Wealth management
    68,147       62,682  
Service charges on deposits
    32,099       35,313  
Gain on sale of mortgage loans
    5,660       9,814  
Other mortgage banking revenue
    692       993  
Net investment securities gains (losses)
    102       72  
Bank-owned life insurance revenue
    10,794       9,316  
Gain on termination of debt
    10,296       3,056  
Sale of merchant portfolio processing
    48,272       -  
OREO income
    6,078       2,568  
Other
    45,424       52,892  
Total other income
    227,564       176,706  
Other expense
               
Salaries and employee benefits
    161,598       155,188  
Net occupancy and equipment
    34,102       33,793  
Software expenses
    7,902       6,598  
Processing charges
    32,082       33,722  
Supplies, printing, postage and delivery
    8,154       9,094  
FDIC insurance
    27,254       15,104  
Professional services
    20,790       19,181  
Amortization of intangibles
    5,140       5,794  
OREO expenses
    37,504       32,623  
Other
    36,965       34,060  
Total other expense
    371,491       345,157  
Income (loss) before income taxes
    (198,574 )     (244,629 )
Provision (benefit) for income taxes
    (83,605 )     (152,982 )
Net income (loss) before noncontrolling interests
    (114,969 )     (91,647 )
Less:  Net income attributable to noncontrolling interests
    (389 )     (319 )
Net income (loss) attributable to Marshall & Ilsley Corporation
    (115,358 )     (91,966 )
Preferred dividends
    (25,180 )     (24,959 )
Net income (loss) attributable to Marshall & Ilsley Corporation common shareholders
  $ (140,538 )   $ (116,925 )
Per share attributable to Marshall & Ilsley Corporation common shareholders
         
Basic
  $ (0.27 )   $ (0.44 )
Diluted
  $ (0.27 )   $ (0.44 )
Dividends paid per common share
  $ 0.01     $ 0.01  
Weighted average common shares outstanding (000's):
               
Basic
    524,086       264,544  
Diluted
    524,086       264,544  
                 
 
 
 

   
Three Months Ended March 31,
 
   
2010
   
2009
 
Net Cash Provided by / (Used in) Operating Activities
  $ 379,613     $ (63,732 )
                 
Cash Flows from Investing Activities:
               
Net increase in short-term investments
    (810,213 )     (106,669 )
Proceeds from sales of securities available for sale
    8       46,023  
Proceeds from maturities of securities available for sale
    346,054       337,432  
Proceeds from maturities of securities held to maturity
    14,009       50,804  
Purchases of securities available for sale
    (771,139 )     (376,840 )
Net decrease in loans and leases
    961,738       352,247  
Purchases of premises and equipment, net
    (5,474 )     (16,890 )
Cash paid for acquisitions, net of cash and cash equivalents acquired
    -       (454 )
Proceeds from sale of merchant portfolio processing
    48,272       -  
Net proceeds from sale of OREO
    106,641       49,684  
Net cash (used in) / provided by investing activities
    (110,104 )     335,337  
                 
Cash Flows from Financing Activities:
               
Net increase (decrease) in deposits
    413,879       (1,460,417 )
Net (decrease) / increase in short-term borrowings
    (226,027 )     1,281,558  
Proceeds from issuance of long-term borrowings
    -       375  
Payments of long-term borrowings
    (593,557 )     (63,461 )
Dividends paid on preferred stock
    (21,437 )     (21,676 )
Dividends paid on common stock
    (5,269 )     (2,630 )
Proceeds from the issuance of common stock
    1,542       2,105  
Other
    55       -  
Net cash used in financing activities
    (430,814 )     (264,146 )
Net (decrease) / increase in cash and cash equivalents
    (161,305 )     7,459  
Cash and cash equivalents, beginning of year
    832,483       1,072,407  
Cash and cash equivalents, end of period
  $ 671,178     $ 1,079,866  
                 
Supplemental Cash Flow Information:
               
Cash paid/(received) during the period for:
               
Interest
  $ 196,936     $ 286,504  
Income taxes
    (136,313 )     (119,001 )
                 
 
 
 

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, 2009.  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 months ended March 31, 2010 and 2009.  The results of operations for the three months ended March 31, 2010 and 2009 are not necessarily indicative of results to be expected for the entire year.


2.  
New Accounting Pronouncements

 
On January 1, 2010 the Corporation adopted updated accounting guidance to the Transfers and Servicing Topic and the Consolidations Topic to the FASB Accounting Standards Codification.  Changes to the Transfers and Servicing Topic eliminate the concept of a qualifying special-purpose entity (“QSPE”), change the requirements for derecognizing financial assets, and require additional disclosures regarding an entity’s continuing involvement in and exposure to risks related to transferred financial assets. The changes to the Consolidations Topic replace the quantitative approach previously required for determining which enterprise should consolidate a variable interest entity with a consolidation approach focused on which enterprise has both the power to direct the activities of the entity that most significantly impact the entity’s economic performance and the obligation to absorb losses of the entity that could potentially be significant to the entity or the right to receive benefits from the entity that could potentially be significant to the entity. The updated Consolidations Topic also requires ongoing reassessments of whether an enterprise is the primary beneficiary of a variable interest entity, and eliminates an exception indicating that a troubled debt restructuring, as defined by the Debt Topic, is not an event that required reconsideration of whether an entity is a variable interest entity and whether an enterprise is the primary beneficiary of a variable interest entity.  The adoption of this updated accounting guidance did not have a material impact on the financial statements and related disclosures.
 
In January 2010, the FASB updated the disclosure guidance in the Fair Value Measurements and Disclosures Topic.  This update clarifies certain existing disclosure requirements and requires separate disclosures of significant transfers in and out of Level 1 and Level 2 of the fair value hierarchy along with descriptions of the reasons for the transfers.  In addition, information about purchases, sales, issuances, and settlements should be presented separately for Level 3 disclosures. The updated guidance was effective beginning on January 1, 2010, except for the disclosures about purchases, sales, issuances, and settlements of Level 3 fair value measurements. Those disclosures are effective beginning on January 1, 2011.  The impact of the updated disclosure guidance is reflected in Note 3 - Fair Value Measurements.

 
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
March 31, 2010 & 2009 (Unaudited)
3.  
Fair Value Measurements

 
The Fair Value Measurements and Disclosures Topic of the Codification generally apply whenever other topics require or permit assets or liabilities to be measured at fair value.  Under the topic, 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 topic does not expand the use of fair value in any new circumstances.

 
Fair-Value Hierarchy

 
The Fair Value Measurements and Disclosures Topic of the Codification 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

 
The 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, residential 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, against 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.
 
 
 
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
March 31, 2010 & 2009 (Unaudited)
 
 
The Corporation’s Private Equity 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.  There were no automobile loan securitizations outstanding at March 31, 2010.

 
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.

 
Certain derivative transactions are executed with counterparties who are large financial institutions (“dealers”).  These derivative transactions primarily consist of interest rate swaps that are used for fair value hedges, cash flow hedges and economic hedges of interest rate swaps executed with the Corporation’s 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 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 unforeseen 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 Corporation’s 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 March 31, 2010.
 
 
 
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 March 31, 2010.  While not significant, the Corporation did factor the estimated amount of expected loss due to customer default in the reported fair value of its customer derivative assets at March 31, 2010.
 
 
 
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
March 31, 2010 & 2009 (Unaudited)
 
 
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 March 31, 2010 ($000’s):

   
Quoted Prices in Active Markets for Identical Assets or Liabilities 
(Level 1)
   
Significant Other Observable Inputs 
(Level 2)
   
Significant Unobservable Inputs 
(Level 3)
 
Assets (1)
                 
Trading Assets:
                 
Trading securities
  $ -     $ 21,859     $ -  
Derivative assets
    -       232,690       -  
Total trading assets
  $ -     $ 254,549     $ -  
                         
Investment securities available for sale (2)
                       
U.S. treasury
  $ -     $ 7,367     $ -  
U.S. government agencies
    -       5,801,642       -  
States and political subdivisions
    -       769,010       40,683  
Residential mortgage backed securities
    -       203,167       -  
Corporate notes
    -       -       -  
Asset backed securities
    -       63,052       88,551  
Foreign
    -       -       43  
Private equity investments
    -       -       70,686  
Total investment securities available for sale
  $ -     $ 6,844,238     $ 199,963  
Accrued interest and other assets:
                       
Financial guarantees - credit protection purchased
  $ -     $ 8     $ -  
                         
Liabilities (1)
                       
Short-term borrowings
  $ -     $ 7,261     $ -  
Accrued expenses and other liabilities:
                       
Derivative liabilities
  $ -     $ 203,307     $ 11,600  
Financial guarantees - credit protection sold
    -       271       -  
Total accrued expenses and other liabilities
  $ -     $ 203,578     $ 11,600  
                         
 

(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 11 – Derivative Financial Instruments and Hedging Activities in Notes to Financial Statements for further information.  Level 3 derivative liabilities represent the fair value of the derivative financial instrument entered into in conjunction with the sale of the Corporation’s shares of Visa, Inc. (“Visa”) Class B common stock.  See Note 14 – Guarantees in Notes to Financial Statements for additional information regarding Visa.
 
(2)  
The investment securities included in Level 3 are primarily senior tranche asset-backed securities.  The amounts presented are exclusive of $411,901 of investments in Federal Reserve Bank and FHLB stock, which are bought and sold at par and are carried at cost, and $64,363 in affordable housing partnerships, which are generally carried on the equity method.


 
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
March 31, 2010 & 2009 (Unaudited)
 
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 March 31, 2009 ($000’s):

   
Quoted Prices in Active Markets for Identical Assets or Liabilities 
(Level 1)
   
Significant Other Observable Inputs 
(Level 2)
   
Significant Unobservable Inputs 
(Level 3)
 
Assets (1)
                 
Trading Assets:
                 
Trading securities
  $ -     $ 385,344     $ -  
Derivative assets
    85       301,294       -  
Total trading assets
  $ 85     $ 686,638     $ -  
                         
Investment securities available for sale (2)
                       
U.S. treasury
  $ -     $ 2,327     $ -  
U.S. government agencies
    -       5,543,626       10  
States and political subdivisions
    -       907,933       11,967  
Residential mortgage backed securities
    -       288,500       -  
Corporate notes
    -       140,263       10,000  
Asset backed securities
    -       1,414       143,120  
Foreign
    -       2,375       2,030  
Equity
    46       -       -  
Private equity investments
    -       -       66,222  
Other
    -       -       5,254  
Total investment securities available for sale
  $ 46     $ 6,886,438     $ 238,603  
                         
Liabilities (1)
                       
Other short-term borrowings
  $ -     $ 168     $ -  
Accrued expenses and other liabilities:
                       
Derivative liabilities
  $ 55     $ 257,223     $ -  
 

(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 11 – Derivative Financial Instruments and Hedging Activities in Notes to Financial Statements for further information.
 
(2)  
The investment securities included in Level 3 are primarily senior tranche asset-backed securities.  The amounts presented are exclusive of $362,890 of investments in Federal Reserve Bank and FHLB stock, which are bought and sold at par and are carried at cost, and $52,099 in affordable housing partnerships, which are generally carried on the equity method.
 
 
 
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
March 31, 2010 & 2009 (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 three months ended March 31, 2010 ($000’s):

   
Investment Securities (1)
   
Private Equity Investments (2)
   
Total
   
Derivative Liabilities
 
Balance at December 31, 2009
  $ 271,196     $ 68,482     $ 339,678     $ 11,600  
Net payments, purchases and sales
    (370 )     1,402       1,032       -  
Discount accretion
    (8 )     -       (8 )     -  
Transfers out of Level 3
    (140,483 )     -       (140,483 )     -  
Total gains or losses (realized or unrealized):
                               
Included in earnings
    -       802       802       -  
Included in other comprehensive income
    (1,058 )     -       (1,058 )     -  
Balance at March 31, 2010
  $ 129,277     $ 70,686     $ 199,963     $ 11,600  
                                 
Unrealized gains or (losses) for the period included in earnings attributable to unrealized gains or losses for financial instruments still held at March 31, 2010
  $ -     $ 802     $ 802       -  
 

(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 (losses) 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 (losses) in the Consolidated Statements of Income.

At March 31, 2010, $62,140 of highly-rated asset backed securities and $66,692 of Government National Mortgage Association securities were transferred to Level 2 as significant inputs to the pricing model used to value these securities became observable in the marketplace, could be derived from observable data or the values could be supported by observable levels at which transactions were executed in the marketplace.

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 three months ended March 31, 2009 ($000’s):

   
Investment Securities (1)
   
Private Equity Investments (2)
   
Other Assets
   
Total
 
Balance at December 31, 2008
  $ 135,953     $ 65,288     $ 5,903     $ 207,144  
Net payments, purchases and sales
    (1,008 )     706       (255 )     (557 )
Discount accretion
    49       -       160       209  
Net transfers in and/or out of Level 3     (2,860     -       -       (2,860
Total gains or losses (realized or unrealized):
                               
Included in earnings
    -       228       52       280  
Included in other comprehensive income
    34,993       -       (606 )     34,387  
Balance at March 31, 2009
  $ 167,127     $ 66,222     $ 5,254     $ 238,603  
                                 
Unrealized gains or losses for the period included in earnings attributable to unrealized gains or losses for financial instruments still held at  March 31, 2009
  $ -     $ 191     $ -     $ 191  
 
 
 
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
March 31, 2010 & 2009 (Unaudited)
 
(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 (losses) 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 (losses) in the Consolidated Statements of Income.

 
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

 
Loans held for sale are recorded at lower of cost or market 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.

Nonaccrual loans greater than $1.0 million were individually evaluated for impairment.  Impairment was measured based on the fair value of the collateral less estimated selling costs or the fair value of the loan (“collateral value method”).  All consumer-related renegotiated loans were evaluated for impairment based on the present value of the estimated cash flows discounted at the loan’s original effective interest rate (“discounted cash flow method”).  A valuation allowance was recorded for the excess of the loan’s 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, the Corporation required a valuation allowance of $156,562 and $163,976 for loans with a recorded investment of $649,365 and $1,220,396 at March 31, 2010 and March 31, 2009, respectively.  See Note 8 – Allowance for Loan and Lease Losses in Notes to Consolidated Financial Statements for more information.

 
OREO is recorded at fair value based on property appraisals, less estimated selling costs, at the date of transfer. Subsequent to transfer, OREO is carried at the lower of cost or fair value, less estimated selling costs. The carrying value of OREO is not re-measured to fair value on a recurring basis but is subject to fair value adjustments when the carrying value exceeds the fair value, less estimated selling costs.  At March 31, 2010 and 2009, the estimated fair value of OREO, less estimated selling costs, amounted to $454,317 and $344,271, respectively.

 
 
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
March 31, 2010 & 2009 (Unaudited)
 
Fair Value of Financial Instruments

 
Book values and estimated fair values for on and off-balance sheet financial instruments as of March 31, 2010 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.

Balance Sheet Financial Instruments ($ in millions)
 
   
March 31, 2010
 
   
Book Value
   
Fair Value
 
             
Financial assets:
           
Cash and short term investments
  $ 2,610.2     $ 2,610.2  
Trading assets
    254.5       254.5  
Investment securities available for sale
    7,520.5       7,520.5  
Investment securities held to maturity
    104.2       107.3  
Net loans and leases
    41,133.7       36,511.1  
Interest receivable
    164.3       164.3  
                 
Financial liabilities:
               
Deposits
  $ 41,982.3     $ 42,325.5  
Short-term borrowings
    894.0       894.0  
Long-term borrowings
    5,865.4       5,745.8  
Derivative liabilities
    215.2       215.2  
Interest payable
    126.8       126.8  
 
 
Where readily available, quoted market prices are utilized by the Corporation for determining fair value.  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.  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.

Net loans and leases
The fair value of loans and leases was derived from discounted cash flow analyses.  Loans and leases as of  March 31, 2010 were grouped into 1,587 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 Corporation’s 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 2 credit rating adjustment could affect the aggregate fair value of the loans and leases by approximately $0.8 billion or 2.0% of the net carrying value of total loans and leases at March 31, 2010.  The fair value of loans held for sale is based on the expected sales price.  At March 31, 2010, the fair value of net loans and leases is considered Level 2 and Level 3 in the fair value hierarchy.

 
 
MARSHALL & ILSLEY CORPORATION>
Notes to Financial Statements - Continued
March 31, 2010 & 2009 (Unaudited)
  
Deposits
The fair value for demand deposits or any interest bearing deposits with no fixed maturity date is considered to approximate 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 the measurement date.  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 March 31, 2010, the fair value of deposits is considered Level 2 in the Fair Value Hierarchy.

Borrowings
Short-term borrowings are generally carried at cost that approximates fair value.  Long-term debt is valued using discounted cash flow analysis with discount curves developed using several methods.  Wherever possible, the Corporation uses pricing from industry accepted services or recently observed transactions in the Corporation’s long-term debt to develop the discounting curves.  The observed transactions are between unaffiliated parties where there has been sufficient transaction volume to conclude that the observed pricing is representative of the fair value of the long-term debt obligation.  In the absence of representative observed transactions, the Corporation develops discount curves based on current incremental borrowing rates for similar types of arrangements.  At March 31, 2010, the fair value of borrowings is considered Level 2 in the Fair Value Hierarchy.


Off-Balance Sheet Financial Instruments
 
 
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 March 31, 2010 ($ in millions):
 
       
Loan commitments
  $ 9.7  
Commercial letters of credit
    0.3  
Standby letters of credit
    8.6  
         
 
 
 
Notes to Financial Statements - Continued
March 31, 2010 & 2009 (Unaudited)
 
4.  
Comprehensive Income

 
The following tables present the Corporation’s comprehensive income ($000’s):

   
Three Months Ended March 31, 2010
 
   
Before-Tax
Amount
 
Tax (Expense)
Benefit
 
Net-of-Tax 
Amount
 
Net loss before noncontrolling interests
  $ (114,969 )
Other comprehensive income (loss):
 
Unrealized gains (losses) on available for sale investment securities:
 
Arising during the period
  $ 40,310     $ (14,636 )   $ 25,674  
Reclassification for securities transactions included in net income
    -       -       -  
Total unrealized gains (losses) on available for sale investment securities
  $ 40,310     $ (14,636 )   $ 25,674  
                         
Unrealized gains (losses) on derivatives hedging variability of cash flows:
 
Arising during the period
  $ (29,136 )   $ 10,850     $ (18,286 )
Reclassification adjustments for hedging activities included in net income
    16,889       (6,289 )     10,600  
Total net gains (losses) on derivatives hedging variability of cash flows
  $ (12,247 )   $ 4,561     $ (7,686 )
                         
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 )     162       (397 )
Total unrealized gains (losses) on funded status of defined benefit postretirement plan
  $ (559 )   $ 162     $ (397 )
Other comprehensive income, net of tax
    17,591  
Total comprehensive income (loss)
    (97,378 )
Less: Comprehensive income attributable to the noncontrolling interests
    (389 )
Comprehensive income (loss) attributable to Marshall & Ilsley Corporation
  $ (97,767 )
                         
                         
                         
                         
   
Three Months Ended March 31, 2009
 
   
Before-Tax
Amount
 
Tax (Expense)
Benefit
 
Net-of-Tax 
Amount
 
Net loss before noncontrolling interests
  $ (91,647 )
Other comprehensive income (loss):
 
Unrealized gains (losses) on available for sale investment securities:
 
Arising during the period
  $ 112,266     $ (39,428 )   $ 72,838  
Reclassification for securities transactions included in net income
    (246 )     86       (160 )
Total unrealized gains (losses) on available for sale investment securities
  $ 112,020     $ (39,342 )   $ 72,678  
                         
Unrealized gains (losses) on derivatives hedging variability of cash flows:
 
Arising during the period
  $ 614     $ (215 )   $ 399  
Reclassification adjustments for hedging activities included in net income
    14,555       (5,094 )     9,461  
Total net gains (losses) on derivatives hedging variability of cash flows
  $ 15,169     $ (5,309 )   $ 9,860  
                         
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
    (350 )     158       (192 )
Total unrealized gains (losses) on funded status of defined benefit postretirement plan
  $ (350 )   $ 158     $ (192 )
Other comprehensive income (loss), net of tax
    82,346  
Total comprehensive income
      (9,301 )
Less: Comprehensive income attributable to the noncontrolling interests
    (319 )
Comprehensive income (loss) attributable to Marshall & Ilsley Corporation
  $ (9,620 )
                         
                         
 
 
 
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
March 31, 2010 & 2009 (Unaudited)
 
Earnings Per Common Share

 
A reconciliation of the numerators and denominators of the basic and diluted per common share computations are as follows (dollars and shares in thousands, except per share data):

   
Three Months Ended March 31, 2010
 
   
Income
(Numerator)
   
Average Shares (Denominator)
   
Per Share
Amount
 
Basic:
                 
Net loss attributable to Marshall & Ilsley Corporation
  $ (115,358 )            
Preferred stock dividends
    (25,180 )            
Net loss attributable to Marshall & Ilsley Corporation common shareholders
  $ (140,538 )     524,086     $ (0.27 )
                         
Effect of dilutive securities:
                       
Stock option, restricted stock and other plans
            -          
                         
Diluted:
                       
Net loss attributable to Marshall & Ilsley Corporation
  $ (115,358 )                
Preferred stock dividends
    (25,180 )                
Net loss attributable to Marshall & Ilsley Corporation common shareholders
  $ (140,538 )     524,086     $ (0.27 )
                         
                         
                         
   
Three Months Ended March 31, 2009
 
   
Income
(Numerator)
   
Average Shares (Denominator)
   
Per Share
Amount
 
Basic:
                       
Net loss attributable to Marshall & Ilsley Corporation
  $ (91,966 )                
Preferred stock dividends
    (24,959 )                
Net loss attributable to Marshall & Ilsley Corporation common shareholders
  $ (116,925 )     264,544     $ (0.44 )
                         
Effect of dilutive securities:
                       
Stock option, restricted stock and other plans
            -          
                         
Diluted:
                       
Net loss attributable to Marshall & Ilsley Corporation
  $ (91,966 )                
Preferred stock dividends
    (24,959 )                
Net loss attributable to Marshall & Ilsley Corporation common shareholders
  $ (116,925 )     264,544     $ (0.44 )
                         
 
 
 
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
March 31, 2010 & 2009 (Unaudited)
 
The table below presents the outstanding options to purchase shares of common stock not included in the computation of diluted earnings per common share because the exercise price  was greater than the average market price of the common shares for the three month periods ended March 31, 2010 and 2009 (anti-dilutive options).  As a result of the Corporation’s reported net loss for the three months ended March 31, 2010 and 2009, all stock options outstanding were excluded from the computation of diluted earnings per common share (shares in thousands):

   
Three Months Ended March 31,
   
2010
 
2009
Shares Subject to Options
 
33,276
 
33,162
         
Price Range
 
$4.76 - $36.82
 
$8.55 - $36.82
 
An outstanding warrant to purchase 13,815,789 shares of the Corporation’s common stock issued in connection with the Corporation’s participation in the U.S. Treasury Department’s Capital Purchase Program was not included in the computation of diluted earnings per common share for the three months ended March 31, 2010 and 2009, because of the reported net loss in both periods.  In addition, the $18.62 per share exercise price of the warrant was greater than the average market price of the common shares for the three months ended March 31, 2010 and 2009.
 
 
 
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
March 31, 2010 & 2009 (Unaudited)
 
6.  
Investment Securities

 
The amortized cost, fair value and unrealized gains and losses of selected investment securities, by major security type, held by the Corporation were as follows ($000's):

   
March 31, 2010
 
   
Amortized
Cost
   
Unrealized
Gains
   
Unrealized
Losses
   
Fair 
Value
 
Available for sale:
                       
U.S. Treasury
  $ 7,325     $ 42     $ -     $ 7,367  
U.S. Government agencies
    5,739,353       69,796       7,507       5,801,642  
States and political subdivisions
    799,007       22,796       12,110       809,693  
Residential mortgage backed securities
    201,297       3,440       1,570       203,167  
Asset backed securities
    207,261       7       55,665       151,603  
Private Equity investments
    70,698       52       64       70,686  
Federal Reserve Bank & FHLB stock
    411,901       -       -       411,901  
Affordable Housing Partnerships
    64,363       -       -       64,363  
Foreign
    43       -       -       43  
Total
  $ 7,501,248     $ 96,133     $ 76,916     $ 7,520,465  
                                 
Held to maturity:
                               
States and political subdivisions
  $ 88,877     $ 3,192     $ 239     $ 91,830  
Corporate notes
    10,000       13       -       10,013  
Foreign
    5,368       121       13       5,476  
Total
  $ 104,245     $ 3,326     $ 252     $ 107,319  
                                 
 
 
   
December 31, 2009
 
   
Amortized
Cost
   
Unrealized
Gains
   
Unrealized
Losses
   
Fair 
Value
 
Available for sale:
                       
U.S. Treasury
  $ 7,335     $ 47     $ 3     $ 7,379  
U.S. Government agencies
    5,291,115       53,272       31,852       5,312,535  
States and political subdivisions
    831,248       23,557       10,803       844,002  
Residential mortgage backed securities
    221,819       2,041       3,250       220,610  
Corporate notes
    10,000       -       -       10,000  
Asset backed securities
    208,330       8       54,118       154,220  
Equity
    115       20       -       135  
Private Equity investments
    68,494       52       64       68,482  
Federal Reserve Bank & FHLB stock
    395,281       -       -       395,281  
Affordable Housing Partnerships
    56,538       -       -       56,538  
Foreign
    4,410       -       -       4,410  
Total
  $ 7,094,685     $ 78,997     $ 100,090     $ 7,073,592  
                                 
Held to maturity:
                               
States and political subdivisions
  $ 102,566     $ 3,613     $ 217     $ 105,962  
Foreign
    1,000       -       -       1,000  
Total
  $ 103,566     $ 3,613     $ 217     $ 106,962  
                                 
 
 
 
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
March 31, 2010 & 2009 (Unaudited)
 
   
March 31, 2009
 
   
Amortized
Cost
   
Unrealized
Gains
   
Unrealized
Losses
   
Fair 
Value
 
Available for sale:
                       
U.S. Treasury
  $ 2,308     $ 19     $ -     $ 2,327  
U.S. Government agencies
    5,445,591       131,480       33,435       5,543,636  
States and political subdivisions
    911,880       20,480       12,460       919,900  
Residential mortgage backed securities
    301,394       935       13,829       288,500  
                                 
Corporate notes
    152,980       234       3,435       149,779  
Cash flow hedge - corporate notes
    484       -       -       484  
Total Corporate notes
    153,464       234       3,435       150,263  
                                 
Asset backed securities
    210,755       -       66,221       144,534  
Equity
    115       -       69       46  
Private Equity investments
    66,234       52       64       66,222  
Federal Reserve Bank & FHLB stock
    362,890       -       -       362,890  
Affordable Housing Partnerships
    52,099       -       -       52,099  
Foreign
    4,405       -       -       4,405  
Other
    4,423       831       -       5,254  
Total
  $ 7,515,558     $ 154,031     $ 129,513     $ 7,540,076  
                                 
Held to maturity:
                               
States and political subdivisions
  $ 186,551     $ 4,933     $ 160     $ 191,324  
Foreign
    1,000       -       -       1,000  
Total
  $ 187,551     $ 4,933     $ 160     $ 192,324  
                                 
 
The following table provides the gross unrealized losses and fair value, aggregated by investment category and the length of time the individual securities have been in a continuous unrealized loss position, at March 31, 2010 ($000’s):
 
   
Less than 12 Months
   
12 Months or More
   
Total
 
   
Fair 
Value
   
Unrealized
Losses
   
Fair 
Value
   
Unrealized
Losses
   
Fair 
Value
   
Unrealized
Losses
 
                                     
U.S. Treasury
  $ -     $ -     $ -     $ -     $ -     $ -  
U.S. Government agencies
    1,632,198       5,749       457,651       1,758       2,089,849       7,507  
States and political subdivisions
    55,955       5,533       96,724       6,816       152,679       12,349  
Residential mortgage backed securities
    11,263       1,066       34,926