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Marshall & Ilsley 10-Q 2010
micorp10q_09-2010.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 September 30, 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   [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.
 
Class
Outstanding at September 30, 2010
Common Stock, $1.00 Par Value
527,980,483
   
 
 
 
 
 

 

MARSHALL & ILSLEY CORPORATION
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2010

 
PART I. FINANCIAL INFORMATION
Page
   
   
PART II. OTHER INFORMATION
 
   
   
   
 
 
 

ITEM 1.  FINANCIAL STATEMENTS

MARSHALL & ILSLEY CORPORATION
($000’s except share data)


   
September 30,
   
December 31,
   
September 30,
 
   
2010
   
2009
   
2009
 
Assets:
                 
Cash and cash equivalents:
                 
Cash and due from banks
  $ 635,861     $ 769,034     $ 674,747  
Federal funds sold and security resale agreements
    18,393       26,839       40,739  
Money market funds
    56,964       36,610       33,666  
Total cash and cash equivalents
    711,218       832,483       749,152  
Interest bearing deposits at other banks
    1,386,600       1,128,794       1,531,018  
Trading assets, at fair value
    355,202       255,646       270,326  
Investment securities:
                       
Available for sale, at fair value
    5,532,533       6,678,311       5,919,481  
Federal Reserve Bank stock and FHLB stock, at cost
    375,486       395,281       390,643  
Held to maturity, fair value $87,134 ($106,962 at December 31, 2009 and $124,341 at September 30, 2009)
    83,352       103,566       120,054  
Loans held for sale
    192,889       214,159       271,139  
Loans and leases
    39,530,245       44,003,467       45,835,175  
Allowance for loan and lease losses
    (1,388,188 )     (1,480,470 )     (1,413,743 )
Net loans and leases
    38,142,057       42,522,997       44,421,432  
Premises and equipment, net
    545,709       565,806       569,875  
Goodwill
    609,517       609,517       611,746  
Other intangible assets
    119,810       134,067       139,920  
Bank-owned life insurance
    1,223,976       1,189,360       1,181,564  
Other real estate owned (OREO)
    425,694       430,821       351,216  
Accrued interest and other assets
    2,182,782       2,149,170       2,017,757  
Total Assets
  $ 51,886,825     $ 57,209,978     $ 58,545,323  
                         
Liabilities and Equity:
                       
Deposits:
                       
Noninterest bearing
  $ 7,620,406     $ 7,832,752     $ 8,286,269  
Interest bearing
    30,580,937       33,804,773       33,434,120  
Total deposits
    38,201,343       41,637,525       41,720,389  
Federal funds purchased and security repurchase agreements
    552,821       520,905       718,106  
Other short-term borrowings
    2,958       599,242       822,520  
Accrued expenses and other liabilities
    1,167,363       1,040,860       1,370,032  
Long-term borrowings
    5,370,348       6,425,855       7,511,960  
Total Liabilities
    45,294,833       50,224,387       52,143,007  
                         
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 (530,164,081shares at December 31, 2009 and 373,764,081 shares at September 30, 2009)
    530,164       530,164       373,764  
Additional paid-in capital
    4,957,595       4,997,606       4,295,403  
Retained earnings
    1,166,751       1,666,021       1,930,715  
Treasury stock, at cost:  2,183,598 shares (4,793,885 shares at December 31, 2009 and 5,453,457 shares at September 30, 2009)
    (54,610 )     (132,191 )     (150,590 )
Deferred compensation
    (38,283 )     (37,538 )     (37,355 )
Accumulated other comprehensive income, net of related taxes
    17,862       (51,321 )     (22,278 )
Total Marshall & Ilsley Corporation shareholders' equity
    6,581,194       6,974,456       6,391,374  
Noncontrolling interest in subsidiaries
    10,798       11,135       10,942  
Total Equity
    6,591,992       6,985,591       6,402,316  
Total Liabilities and Equity
  $ 51,886,825     $ 57,209,978     $ 58,545,323  
                         
See notes to financial statements.
                       

 

 
MARSHALL & ILSLEY CORPORATION
($000’s except per share data)


   
Three Months Ended September 30,
 
   
2010
   
2009
 
Interest and fee income
           
Loans and leases
  $ 485,361     $ 547,505  
Investment securities:
               
Taxable
    39,853       43,565  
Exempt from federal income taxes
    8,746       10,671  
Trading securities
    166       136  
Short-term investments
    879       1,200  
Total interest and fee income
    535,005       603,077  
Interest expense
               
Deposits
    100,156       133,633  
Short-term borrowings
    3,607       1,546  
Long-term borrowings
    49,760       79,207  
Total interest expense
    153,523       214,386  
Net interest income
    381,482       388,691  
Provision for loan and lease losses
    431,744       578,701  
Net interest income (loss) after provision for loan and lease losses
    (50,262 )     (190,010 )
Other income
               
Wealth management
    69,511       66,678  
Service charges on deposits
    31,824       33,564  
Gain on sale of mortgage loans
    7,109       11,771  
Other mortgage banking revenue
    587       934  
Net investment securities gains (losses)
    41,547       (1,517 )
Bank-owned life insurance revenue
    12,066       10,347  
Gain on termination of debt
    8,498       56,148  
Sale of merchant portfolio processing
    -       -  
Other
    52,359       46,051  
Total other income
    223,501       223,976  
Other expense
               
Salaries and employee benefits
    190,953       179,175  
Net occupancy and equipment
    32,967       33,297  
Software expenses
    8,128       7,704  
Processing charges
    32,102       33,623  
Supplies, printing, postage and delivery
    8,086       8,376  
FDIC insurance
    22,603       17,813  
Professional services
    27,539       23,541  
Amortization of intangibles
    5,012       5,889  
Net OREO expenses
    26,730       52,556  
Loss on brokered CDs
    28,829       2,136  
Other
    36,654       40,983  
Total other expense
    419,603       405,093  
Income (loss) before income taxes
    (246,364 )     (371,127 )
Provision (benefit) for income taxes
    (102,841 )     (148,170 )
Net income (loss) including noncontrolling interests
    (143,523 )     (222,957 )
Less:  Net income attributable to noncontrolling interests
    (348 )     (402 )
Net income (loss) attributable to Marshall & Ilsley Corporation
    (143,871 )     (223,359 )
Preferred dividends
    (25,295 )     (25,068 )
Net income (loss) attributable to Marshall & Ilsley Corporation common shareholders
  $ (169,166 )   $ (248,427 )
Per share attributable to Marshall & Ilsley Corporation common shareholders
               
Basic
  $ (0.32 )   $ (0.68 )
Diluted
  $ (0.32 )   $ (0.68 )
Dividends paid per common share
  $ 0.01     $ 0.01  
Weighted average common shares outstanding (000's):
               
Basic
    524,747       366,846  
Diluted
    524,747       366,846  
                 
See notes to financial statements.
               


 
 
MARSHALL & ILSLEY CORPORATION
($000’s except per share data)


   
Nine Months Ended September 30,
 
   
2010
   
2009
 
Interest and fee income
           
Loans and leases
  $ 1,495,208     $ 1,671,002  
Investment securities:
               
Taxable
    137,163       164,096  
Exempt from federal income taxes
    27,014       34,468  
Trading securities
    483       3,574  
Short-term investments
    3,049       2,228  
Total interest and fee income
    1,662,917       1,875,368  
Interest expense
               
Deposits
    319,289       409,995  
Short-term borrowings
    4,687       8,419  
Long-term borrowings
    152,094       274,693  
Total interest expense
    476,070       693,107  
Net interest income
    1,186,847       1,182,261  
Provision for loan and lease losses
    1,329,755       1,675,617  
Net interest income (loss) after provision for loan and lease losses
    (142,908 )     (493,356 )
Other income
               
Wealth management
    207,500       195,197  
Service charges on deposits
    97,141       102,932  
Gain on sale of mortgage loans
    19,839       38,339  
Other mortgage banking revenue
    1,998       3,219  
Net investment securities gains (losses)
    45,378       81,220  
Bank-owned life insurance revenue
    34,640       27,625  
Gain on termination of debt
    19,694       68,446  
Sale of merchant portfolio processing
    48,272       -  
Other
    144,658       146,178  
Total other income
    619,120       663,156  
Other expense
               
Salaries and employee benefits
    537,870       521,601  
Net occupancy and equipment
    100,043       99,527  
Software expenses
    24,622       21,317  
Processing charges
    96,339       101,157  
Supplies, printing, postage and delivery
    24,796       26,400  
FDIC insurance
    76,493       82,150  
Professional services
    75,044       64,719  
Amortization of intangibles
    15,194       17,526  
Net OREO expenses
    83,973       116,230  
Loss on brokered CDs
    37,996       5,956  
Other
    100,441       103,599  
Total other expense
    1,172,811       1,160,182  
Income (loss) before income taxes
    (696,599 )     (990,382 )
Provision (benefit) for income taxes
    (289,914 )     (467,295 )
Net income (loss) including noncontrolling interests
    (406,685 )     (523,087 )
Less:  Net income attributable to noncontrolling interests
    (1,105 )     (1,193 )
Net loss attributable to Marshall & Ilsley Corporation
    (407,790 )     (524,280 )
Preferred dividends
    (75,713 )     (75,040 )
Net loss attributable to Marshall & Ilsley Corporation common shareholders
  $ (483,503 )   $ (599,320 )
Per share attributable to Marshall & Ilsley Corporation common shareholders
               
Basic
  $ (0.92 )   $ (1.97 )
Diluted
  $ (0.92 )   $ (1.97 )
Dividends paid per common share
  $ 0.03     $ 0.03  
Weighted average common shares outstanding (000's):
               
Basic
    524,388       304,450  
Diluted
    524,388       304,450  
                 
See notes to financial statements.
               

 
 
 
MARSHALL & ILSLEY CORPORATION
($000’s)


   
Nine Months Ended September 30,
 
   
2010
   
2009
 
Net Cash Provided by Operating Activities
  $ 858,792     $ 828,767  
                 
Cash Flows from Investing Activities:
               
Net increase in short-term investments
    (257,805 )     (1,521,332 )
Proceeds from sales of securities available for sale
    1,172,528       1,208,197  
Proceeds from redemptions of Federal Reserve Bank stock and FHLB stock
    63,916       37,450  
Proceeds from maturities of securities available for sale
    1,025,539       1,228,936  
Proceeds from maturities of securities held to maturity
    35,375       119,040  
Purchases of securities available for sale
    (924,591 )     (1,008,761 )
Purchases of Federal Reserve Bank stock and FHLB stock
    (44,121 )     (88,314 )
Net decrease in loans and leases
    2,688,412       1,989,954  
Purchases of premises and equipment, net
    (17,682 )     (42,105 )
Cash paid for acquisitions, net of cash and cash equivalents acquired
    (1,968 )     (479 )
Proceeds from sale of merchant portfolio processing
    48,272       -  
Net proceeds from sale of OREO
    347,205       207,193  
Net cash provided by investing activities
    4,135,080       2,129,779  
                 
Cash Flows from Financing Activities:
               
Net (decrease) increase in deposits
    (3,385,304 )     733,073  
Net decrease in short-term borrowings
    (571,975 )     (2,514,236 )
Proceeds from issuance of long-term borrowings
    -       375  
Payments of long-term borrowings
    (1,081,309 )     (1,989,112 )
Dividends paid on preferred stock
    (64,312 )     (64,551 )
Dividends paid on common stock
    (15,767 )     (8,953 )
Proceeds from the issuance of common stock
    4,527       561,987  
Other
    (997 )     (384 )
Net cash used in financing activities
    (5,115,137 )     (3,281,801 )
Net decrease in cash and cash equivalents
    (121,265 )     (323,255 )
Cash and cash equivalents, beginning of year
    832,483       1,072,407  
Cash and cash equivalents, end of period
  $ 711,218     $ 749,152  
                 
Supplemental Cash Flow Information:
               
Cash paid / (received) during the period for:
               
Interest
  $ 523,972     $ 770,216  
Income taxes
    (135,626 )     (118,564 )
                 
See notes to financial statements.
               
 


MARSHALL & ILSLEY CORPORATION
September 30, 2010 & 2009 (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, 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 and nine months ended September 30, 2010 and 2009.  The results of operations for the three and nine months ended September 30, 2010 and 2009 are not necessarily indicative of results to be expected for the entire year.

 
Prior to 2010, the Corporation had presented investments in Federal Reserve Bank stock and FHLB stock within Investment Securities Available for Sale on the consolidated balance sheet.  During 2010, the Corporation determined that investments in Federal Reserve Bank stock and FHLB stock should be separately presented on the consolidated balance sheet.  As a result, the accompanying 2009 consolidated balance sheets and consolidated statements of cash flows have been restated to present investments in Federal Reserve Bank stock and FHLB stock separately from Investment Securities Available for Sale.

 
Prior to 2010, the Corporation had presented gains on sale of other real estate owned (“OREO”) within Other income as OREO income.  During 2010, the Corporation determined that gains on sale of OREO should be presented net along with OREO expenses in the consolidated statements of income.  As a result, the accompanying 2009 consolidated statements of income and related disclosures have been restated to present gains on sale of OREO along with OREO expenses in Net OREO expenses.


2.  
New Accounting Pronouncements

In July 2010, the FASB issued new accounting guidance that will require additional disclosures in the notes to the financial statements regarding the nature of credit risk inherent in the loan and lease portfolio, how that credit risk is analyzed and assessed in arriving at the allowance for credit losses and the changes in the loan portfolio and the allowance for credit losses.  For the Corporation, period end disclosures will be required as of December 31, 2010 and disclosures about activity that occurs during the period will be initially required for the three months ended March 31, 2011. The Corporation is in the process of evaluating the impact of the additional disclosure requirements.

Effective January 1, 2010, the Corporation adopted updated accounting guidance to the Transfers and Servicing Topic and the Consolidations Topic of the FASB Accounting Standards Codification.  Changes to the Transfers and Servicing Topic eliminated the concept of a qualifying special-purpose entity (“QSPE”), changed the requirements for derecognizing financial assets, and required 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 eliminated the scope exception 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 Corporation’s financial statements and related disclosures.
 

 
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
September 30, 2010 & 2009 (Unaudited)
 
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.

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
September 30, 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 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 September 30, 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 September 30, 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 September 30, 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 September 30, 2010.
 
 
 
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
September 30, 2010 & 2009 (Unaudited)
 
 
Loans Held for Sale

Beginning in the second quarter of 2010, the Corporation elected to account for certain residential mortgage loans held for sale into the secondary market at fair value.  The fair value of those mortgage loans held for sale was determined using current secondary market prices for loans with similar interest rates, maturities and credit quality and are classified as Level 2.

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 ($000’s):


September 30, 2010
 
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
  $ -     $ 40,888     $ -  
Derivative assets
    -       314,314       -  
Total trading assets
  $ -     $ 355,202     $ -  
Investment securities available for sale (2)
                       
U.S. treasury
  $ -     $ 2,129     $ -  
U.S. government agencies
    -       4,254,097       -  
States and political subdivisions
    -       783,593       41,633  
Residential mortgage backed securities
    -       169,664       -  
Asset backed securities
    -       50,700       96,724  
Private equity investments
    -       -       71,294  
Total investment securities available for sale
  $ -     $ 5,260,183     $ 209,651  
                         
Residential mortgage loans held for sale
  $ -     $ 12,303     $ -  
Accrued interest and other assets:
                       
Financial guarantees - credit protection purchased
  $ -     $ 6     $ -  
Liabilities (1)
                       
Other short-term borrowings
  $ -     $ 2,226     $ -  
Accrued expenses and other liabilities:
                       
Derivative liabilities
  $ -     $ 286,254     $ 9,616  
Financial guarantees - credit protection sold
    -       1,200       -  
Total accrued expenses and other liabilities
  $ -     $ 287,454     $ 9,616  


 
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
September 30, 2010 & 2009 (Unaudited)

 
December 31, 2009
 
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
  $ -     $ 29,993     $ -  
Derivative assets
    -       225,653       -  
Total trading assets
  $ -     $ 255,646     $ -  
                         
Investment securities available for sale (2)
                       
U.S. treasury
  $ -     $ 7,379     $ -  
U.S. government agencies
    -       5,247,974       64,561  
States and political subdivisions
    -       802,023       41,979  
Residential mortgage backed securities
    -       220,610       -  
Corporate notes
    -       -       10,000  
Asset backed securities
    -       949       153,271  
Foreign
    -       3,025       1,385  
Equity
    135       -       -  
Private equity investments
    -       -       68,482  
Total investment securities available for sale
  $ 135     $ 6,281,960     $ 339,678  
                         
Accrued interest and other assets:
                       
Financial guarantees - credit protection purchased
  $ -     $ 13     $ -  
                         
Liabilities (1)
                       
Other short-term borrowings
  $ -     $ 14,604     $ -  
Accrued expenses and other liabilities:
                       
Derivative liabilities
  $ -     $ 195,003     $ 11,600  
    Financial guarantees - credit protection sold
    -       198       -  
Total accrued expenses and other liabilities
  $ -     $ 195,201     $ 11,600  
 
 
 
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
September 30, 2010 & 2009 (Unaudited)
 
 
September 30, 2009
 
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
  $ -     $ 18,425     $ -  
Derivative assets
    -       251,901       -  
Total trading assets
  $ -     $ 270,326     $ -  
                         
Investment securities available for sale (2)
                       
U.S. treasury
  $ -     $ 7,366     $ -  
U.S. government agencies
    -       4,495,467       279  
States and political subdivisions
    -       850,634       42,680  
Residential mortgage backed securities
    -       236,381       -  
Corporate notes
    -       -       10,000  
Asset backed securities
    -       1,140       147,524  
Foreign
    -       2,375       1,383  
Equity
    154       -       -  
Private equity investments
    -       -       68,870  
Total investment securities available for sale
  $ 154     $ 5,593,363     $ 270,736  
                         
Accrued interest and other assets:
                       
Financial guarantees - credit protection purchased
  $ -     $ 14     $ -  
                         
Liabilities (1)
                       
Other short-term borrowings
  $ -     $ 6,696     $ -  
Accrued expenses and other liabilities:
                       
Derivative liabilities
  $ -     $ 220,228     $ 11,600  
Financial guarantees - credit protection sold
    -       198       -  
Total accrued expenses and other liabilities
  $ -     $ 220,426     $ 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 12 – Derivative Financial Instruments and Hedging Activities in Notes to Financial Statements for further information.  Level 3 derivative liabilities represent the fair value of a 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 15 – Guarantees in Notes to Financial Statements for additional information regarding Visa.

(2)  
The amounts presented are exclusive of $62,699, $56,538 and $55,228 in affordable housing partnerships at September 30, 2010, December 31, 2009, and September 30, 2009, respectively, which are generally carried on the equity method.

 
 
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
September 30, 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 nine months ended September 30, 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       -  
Accretion/amortization
    (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  
                                 
Net payments, purchases and sales
    (393 )     (759 )     (1,152 )     (1,984 )
Accretion/amortization
    13       -       13       -  
Transfers in to Level 3
    12,008       -       12,008       -  
Total gains or losses (realized or unrealized):
                               
Included in earnings
    -       1,055       1,055       -  
Included in other comprehensive income
    1,903       -       1,903       -  
Balance at June 30, 2010
  $ 142,808     $ 70,982     $ 213,790     $ 9,616  
                                 
Net payments, purchases and sales
    (825 )     (2,099 )     (2,924 )     -  
Accretion/amortization
    13       -       13       -  
Total gains or losses (realized or unrealized):
                               
Included in earnings
    -       2,411       2,411       -  
Included in other comprehensive income
    (3,639 )     -       (3,639 )     -  
Balance at September 30, 2010
  $ 138,357     $ 71,294     $ 209,651     $ 9,616  
                                 
Unrealized gains or (losses) for the period included in earnings attributable to unrealized gains or losses for financial instruments still held at September 30, 2010
  $ -     $ 5,534     $ 5,534     $ -  


(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 June 30, 2010, securities were transferred to Level 3 as the Corporation determined that it could not obtain a sufficient number of observable inputs in the form of market or broker quotes to substantiate a level 2 classification. 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.
 
 
 
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
September 30, 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 nine months ended September 30, 2009 ($000’s):

   
Investment
Securities (1)
   
Private Equity
Investments (2)
   
Other Assets
   
Total
   
Derivative
Liabilities
 
Balance at December 31, 2008
  $ 135,953     $ 65,288     $ 5,903     $ 207,144     $ -  
Net payments, purchases and sales
    (1,008 )     706       (255 )     (557 )     -  
Accretion/amortization
    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     $ -  
                                         
Net payments, purchases and sales
    (1,048 )     426       (194 )     (816 )     -  
Accretion/amortization
    41       -       148       189       -  
Net transfers in and/or out of Level 3
    -       -       -       -       -  
Total gains or losses (realized or unrealized):
                                       
Included in earnings
    -       3,869       10       3,879       14,743  
Included in other comprehensive income
    18,439       -       (273 )     18,166       -  
Balance at June 30, 2009
  $ 184,559     $ 70,517     $ 4,945     $ 260,021     $ 14,743  
                                         
Net payments, purchases and sales
    (902 )     2,833       (4,624 )     (2,693 )     (3,143 )
Accretion/amortization
    44       -       -       44       -  
Net transfers in and/or out of Level 3
    31,447       -       -       31,447       -  
Total gains or losses (realized or unrealized):
                                       
Included in earnings
    -       (4,480 )     238       (4,242 )     -  
Included in other comprehensive income
    (13,282 )     -       (559 )     (13,841 )     -  
Balance at September 30, 2009
  $ 201,866     $ 68,870     $ -     $ 270,736     $ 11,600  
                                         
Unrealized gains or losses for the period included in earnings attributable to unrealized gains or losses for financial instruments still held at  September  30, 2009
  $ -     $ (671 )   $ -     $ (671 )   $ (14,743 )


(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.
 
 
 
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
September 30, 2010 & 2009 (Unaudited)
 
 
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

 
Certain assets are measured at fair value on a nonrecurring basis.  These assets are not measured at fair value on an ongoing basis; however, they are subject to fair value adjustments in certain circumstances, such as when there is evidence of impairment or a change in the amount of a previously recognized impairment.

The table presented below summarizes the adjusted carrying values and level of fair value hierarchy for assets measured at fair value on a nonrecurring basis ($000’s):


   
September 30, 2010
   
September 30, 2009
 
                                                 
   
Quoted Prices in
   
Significant
               
Quoted Prices in
   
Significant
             
   
Active Markets
   
Other
   
Significant
         
Active Markets
   
Other
   
Significant
       
   
for Identical
   
Observable
   
Unobservable
         
for Identical
   
Observable
   
Unobservable
       
   
Assets
   
Inputs
   
Inputs
         
Assets
   
Inputs
   
Inputs
       
   
(Level 1)
   
(Level 2)
   
(Level 3)
   
Total
   
(Level 1)
   
(Level 2)
   
(Level 3)
   
Total
 
Loans held for sale
  $ -     $ 13,468     $ -     $ 13,468     $ -     $ 34,972     $ -     $ 34,972  
Impaired loans
    -       -       676,506       676,506       -       -       934,946       934,946  
Other real estate owned
    -       -       72,750       72,750       -       -       109,872       109,872  
   Total
  $ -     $ 13,468     $ 749,256     $ 762,724     $ -     $ 34,972     $ 1,044,818     $ 1,079,790  
 
 
 
Net losses related to nonrecurring fair value measurements of certain assets consisted of the following ($000’s):


   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2010
   
2009
   
2010
   
2009
 
Loans held for sale
  $ 7,135     $ 18,146     $ 19,602     $ 29,733  
Impaired loans
    198,350       238,149       637,156       751,236  
Other real estate owned
    12,614       39,360       45,165       84,333  
   Total
  $ 218,099     $ 295,655     $ 701,923     $ 865,302  

Loans held for sale are recorded at lower of cost or market or fair value.  Loans held for sale that are carried at lower of cost or market are reported at fair value on a nonrecurring basis. Such fair values are generally based on bids and are considered Level 2 fair values.

Adjustments for loans held for sale that are carried at lower of cost or market represent additional net write-downs during the period presented to record the loans at the lower of cost or fair value subsequent to their initial classification as loans held for sale.

Nonaccrual loans greater than $1.0 million are individually evaluated for impairment each quarter.  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.

Losses on impaired loans represent net write-downs during the periods presented on impaired loans that were individually evaluated for impairment based on the estimated fair value of the collateral less estimated selling costs, excluding impaired loans fully charged off.
 
 
 
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
September 30, 2010 & 2009 (Unaudited)
 
 
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.
 
 
 
Losses on OREO represent the net write-downs during the periods presented where the carrying value of the foreclosed real estate exceeded the current fair value less estimated selling costs of the foreclosed real estate subsequent to their initial classification as foreclosed assets.

 
Fair Value of Financial Instruments

 
Book values and estimated fair values for on and off-balance sheet financial instruments 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)
 
 
 
   
September 30, 2010
   
September 30, 2009
 
   
Book Value
   
Fair Value
   
Book Value
   
Fair Value
 
             
Financial assets:
                       
Cash and short term investments
  $ 2,097.8     $ 2,097.8     $ 2,280.2     $ 2,280.2  
Trading assets
    355.2       355.2       270.3       270.3  
Investment securities available for sale
    5,532.5       5,532.5       5,919.5       5,919.5  
Federal Reserve Bank stock and FHLB stock, at cost
    375.5       375.5       390.6       390.6  
Investment securities held to maturity
    83.4       87.1       120.1       124.3  
Net loans and leases
    38,334.9       34,370.0       44,692.6       40,847.8  
Interest receivable
    146.1       146.1       176.2       176.2  
Financial guarantees - credit protection purchased
    -       -       -       -  
                                 
Financial liabilities:
                               
Deposits
  $ 38,201.3     $ 38,462.1     $ 41,720.4     $ 42,216.9  
Short-term borrowings
    555.8       555.6       1,540.6       1,546.4  
Long-term borrowings
    5,370.3       5,324.9       7,512.0       7,140.6  
Derivative liabilities
    295.9       295.9       232.0       232.0  
Interest payable
    109.7       109.7       163.0       163.0  
Financial guarantees - credit protection sold
    1.2       1.2       -       -  


 
Quoted market prices are utilized by the Corporation for determining fair value, where readily available. 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.
 
 

MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
September 30, 2010 & 2009 (Unaudited)

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  September 30, 2010 were grouped into 1,834 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 made in management’s judgment 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 two 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 September 30, 2010.  The fair value of loans held for sale is based on the expected sales price.  At September 30, 2010, the fair value of net loans and leases is considered Level 2 and Level 3 in the fair value hierarchy.

Deposits
The fair value for demand deposits or any interest bearing deposits with no fixed maturity date is considered to approximate 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 September 30, 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 September 30, 2010, the fair value of borrowings is considered Level 2 in the Fair Value Hierarchy.

Off-Balance Sheet Financial Instruments
 
 
Fair values of loan commitments and letters of credit have been estimated based on the equivalent fees, net of expenses, that would be charged for similar contracts and customers ($ in millions):


   
September 30,
 
   
2010
   
2009
 
Loan commitments
  $ 6.6     $ 13.2  
Commercial letters of credit
    0.2       0.2  
Standby letters of credit
    6.3       9.5  
 
 
 
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
September 30, 2010 & 2009 (Unaudited)
 
4.  
Comprehensive Income

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


   
Three Months Ended September 30, 2010
 
   
Before-Tax
Amount
   
Tax (Expense)
Benefit
   
Net-of-Tax 
Amount
 
Net loss including noncontrolling interests
              $ (143,523 )
Other comprehensive income (loss):