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| MI > SEC Filings for MI > Form 10-Q on 10-Aug-2009 | All Recent SEC Filings |
10-Aug-2009
Quarterly Report
MARSHALL & ILSLEY CORPORATION
CONSOLIDATED AVERAGE BALANCE SHEETS
($000's)
Three Months Ended June 30,
2009 2008
Assets
Cash and due from banks $ 747,773 $ 879,213
Trading assets 581,127 162,048
Short-term investments 458,650 370,650
Investment securities:
Taxable 6,254,354 6,548,896
Tax-exempt 1,059,464 1,185,827
Total investment securities 7,313,818 7,734,723
Loans and leases:
Loans and leases, net of unearned
income 48,875,520 49,930,536
Allowance for loan and lease losses (1,361,173 ) (681,983 )
Net loans and leases 47,514,347 49,248,553
Premises and equipment, net 572,193 521,284
Accrued interest and other assets 3,755,832 4,573,140
Total Assets $ 60,943,740 $ 63,489,611
Liabilities and Equity
Deposits:
Noninterest bearing $ 7,354,814 $ 5,827,732
Interest bearing 32,503,139 33,225,352
Total deposits 39,857,953 39,053,084
Federal funds purchased and security
repurchase agreements 1,735,291 3,002,304
Other short-term borrowings 2,471,202 3,796,189
Long-term borrowings 9,439,766 9,638,628
Accrued expenses and other
liabilties 1,040,822 1,023,151
Total Liabilities 54,545,034 56,513,356
Equity
Marshall & Ilsley Corporation
shareholders' equity 6,388,188 6,966,343
Noncontrolling interest in
subsidiaries 10,518 9,912
Total Equity 6,398,706 6,976,255
Total Liabilities and Equity $ 60,943,740 $ 63,489,611
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MARSHALL & ILSLEY CORPORATION
CONSOLIDATED AVERAGE BALANCE SHEETS
($000's)
Six Months Ended June 30,
2009 2008
Assets
Cash and due from banks $ 775,316 $ 916,090
Trading assets 583,045 170,178
Short-term investments 514,207 351,423
Investment securities:
Taxable 6,429,895 6,608,841
Tax-exempt 1,070,508 1,214,174
Total investment securities 7,500,403 7,823,015
Loans and leases:
Loans and leases, net of unearned
income 49,343,013 49,270,264
Allowance for loan and lease losses (1,303,627 ) (619,730 )
Net loans and leases 48,039,386 48,650,534
Premises and equipment, net 570,739 515,272
Accrued interest and other assets 3,703,387 4,494,598
Total Assets $ 61,686,483 $ 62,921,110
Liabilities and Equity
Deposits:
Noninterest bearing $ 6,920,679 $ 5,728,051
Interest bearing 32,842,406 32,662,390
Total deposits 39,763,085 38,390,441
Federal funds purchased and security
repurchase agreements 1,842,092 3,279,978
Other short-term borrowings 3,119,008 3,327,055
Long-term borrowings 9,504,882 9,829,554
Accrued expenses and other
liabilties 1,081,435 1,087,268
Total Liabilities 55,310,502 55,914,296
Equity
Marshall & Ilsley Corporation
shareholders' equity 6,365,528 6,996,903
Noncontrolling interest in
subsidiaries 10,453 9,911
Total Equity 6,375,981 7,006,814
Total Liabilities and Equity $ 61,686,483 $ 62,921,110
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For the three months ended June 30, 2009, the net loss attributable to the Corporation's common shareholders amounted to $234.0 million or $0.83 per diluted common share compared to the net loss attributable to the Corporation's common shareholders of $393.8 million or $1.52 per diluted common share for the three months ended June 30, 2008. For the six months ended June 30, 2009, the net loss attributable to common shareholders amounted to $350.9 million or $1.29 per diluted common share compared to the net loss attributable to common shareholders of $247.6 million or $0.95 per diluted common share for the six months ended June 30, 2008.
The net loss attributable to the Corporation's common shareholders for the three and six months ended June 30, 2009 includes $25.0 million and $50.0 million, or $0.09 and $0.18 per diluted common share, respectively, for dividends on the Series B preferred stock issued to the U.S. Treasury in the fourth quarter of 2008 under the Capital Purchase Program.
Consistent with recent quarters, credit quality-related charges were the primary driver of the Corporation's financial performance. For the three months ended June 30, 2009, the provision for loan and lease losses amounted to $619.0 million, which on an after-tax basis was approximately $390.0 million or $1.39 per diluted share. For the six months ended June 30, 2009, the provision for loan and lease losses amounted to $1,096.9 million, which on an after-tax basis was approximately $691.1 million or $2.53 per diluted share. For the three months ended June 30, 2008, the provision for loan and lease losses amounted to $886.0 million, which on an after-tax basis was approximately $566.7 million or $2.19 per diluted share. For the six months ended June 30, 2008, the provision for loan and lease losses amounted to $1,032.3 million, which on an after-tax basis was approximately $660.3 million or $2.55 per diluted share.
The recessionary economy, which includes elevated levels of unemployment, and the weak national real estate markets continued to adversely affect the Corporation's loan and lease portfolio in the second quarter and first half of 2009. Since March 31, 2009, nonaccrual loans and leases, which the Corporation refers to as nonperforming loans and leases, have increased $341.6 million or 16.5% and since December 31, 2008, nonperforming loans and leases have increased $889.2 million or 58.2% and amounted to $2,416.1 million at June 30, 2009. In addition, the amount of impairment, which affects charge-offs and the level of the allowance for loans and leases, remained elevated due to the depressed state of underlying real estate collateral values.
The Corporation continued to experience elevated levels of expenses due to the increase in operating costs associated with collection efforts and carrying nonperforming assets. The estimated increase in expense associated with collection efforts and carrying nonperforming assets, net of related revenue, amounted to $18.8 million for the second quarter of 2009 compared to the second quarter of 2008, which on an after-tax basis was approximately $11.9 million or $0.04 per diluted common share. For the first half of 2009 compared to the first half of 2008, the estimated increase in expense associated with collection efforts and carrying nonperforming assets, net of related revenue, amounted to $39.8 million, which on an after-tax basis was approximately $25.1 million or $0.09 per diluted common share.
Slowing loan growth, declining asset yields, competitive deposit pricing in the low interest rate environment and the increase in nonperforming loans, resulted in lower net interest income in the second quarter and six months ended June 30, 2009 compared to the second quarter and six months ended June 30, 2008. The equity market showed some improvement in the second quarter of 2009 compared to the first quarter of 2009. However, equity market volatility along with downward pressure in the equity markets resulted in lower wealth management revenue in the three and six months ended June 30, 2009 compared to the three and six months ended June 30, 2008. An increase in mortgage loan closings, primarily due to re-financings, and sales of those loans to the secondary market resulted in mortgage banking revenue growth in the three and six months ended June 30, 2009 compared to the three and six months ended June 30, 2008. During the second quarter of 2009, the Corporation sold United States government agency investment securities and sold its Visa, Inc. ("Visa"), Series B common stock. The gain resulting from these transactions amounted to $79.0 million, which on an after-tax basis was approximately $49.8 million or $0.18 per diluted common share.
Operating expenses for the three and six months ended June 30, 2009 include the Federal Deposit Insurance Corporation ("FDIC") special assessment related to insurance on deposits in addition to the increase related to regular insurance premiums for insurance on deposits. The special assessment amounted to $29.3 million, which on an after-tax basis was approximately $18.5 million or $0.07 per diluted common share. Operating expenses, excluding the expenses associated with collection efforts and carrying nonperforming assets, FDIC insurance expense and the reversal of the Visa litigation accrual in the first quarter of 2008, declined 7.7% in the first half of 2009 compared to the first half of 2008. That decline reflects lower incentive compensation and the impact of the expense reduction initiatives announced in the Corporation's fourth quarter 2008 earnings release. During the second quarter of 2009, the Corporation recorded a tax benefit of $18.0 million or $0.06 per diluted common share due to the favorable resolution of a tax matter. For the six months ended June 30, 2009, tax benefits arising from the previous disclosed favorable resolution of a tax matter and recently enacted legislation that required combined reporting for Wisconsin state income tax purposes in the first quarter of 2009 amounted to $69.0 million or $0.25 per diluted common share.
The allowance for loans and leases amounted to $1,367.8 million or 2.84% of total loans and leases outstanding at June 30, 2009 compared to $1,352.1 million or 2.75% at March 31, 2009 and $1,028.8 million or 2.05% at June 30, 2008. Net charge-offs amounted to $603.3 million or 4.95% of average loans and leases for the three months ended June 30, 2009 compared to $400.7 million or 3.23% of average loans and leases for the three months ended June 30, 2008. For the six months ended June 30, 2009, net charge-offs amounted to $931.3 million or 3.81% of average loans and leases compared to $531.8 million or 2.17% of average loans and leases for the six months ended June 30, 2008.
On July 31, 2009, the Corporation sold a pool of predominantly nonperforming residential loans. The total amount sold had an unpaid principal balance of $296.7 million. These loans were classified as loans held for sale and charge-offs of $150.8 million, which are included in net charge-offs above, were recognized at June 30, 2009.
The Corporation continued to employ a variety of strategies to mitigate and reduce its loan loss exposures such as loan sales and restructuring loan terms to lessen the financial stress and the probability of foreclosure for qualifying customers that have demonstrated the capacity and ability to repay their debt obligations in a manner that serves the best interests of both the customer and the Corporation. Troubled debt restructurings, which the Corporation refers to as renegotiated loans, increased approximately $548.2 million since December 31, 2008 and amounted to $818.5 million at June 30, 2009.
At June 30, 2009, the Corporation's Tier 1 regulatory capital ratio was 9.88% or $2,079.0 million in excess of well capitalized under the Federal Reserve Board's regulatory framework. To be well capitalized under the regulatory framework, the Tier 1 capital ratio must meet or exceed 6%. The Corporation's Tier 1 regulatory capital ratio at June 30, 2009 includes the impact of the closing of its public offering of 100.0 million shares of its common stock at $5.75 per share in the second quarter. The 100.0 million shares included 13.0 million shares issued pursuant to the option granted to the underwriters by the Corporation, which was exercised in full. In addition, under the initial shelf registration, the Corporation issued shares of its common stock prior to the public offering previously discussed.
With regard to the outlook for the remainder of 2009, the low interest rate environment together with the numerous other factors that impact net interest income and the net interest margin have made it very difficult to project the net interest margin with a reasonable degree of certainty. However, management expects net interest margin will be relatively stable and comparable with the net interest margin reported for the second quarter of 2009 in the near term with potential opportunities for longer-term net interest margin growth. Commercial and industrial loans contracted slightly in the second quarter of 2009 compared to the first quarter of 2009. Commercial and industrial loan balances are expected to be relatively unchanged in 2009 compared to 2008. Construction and development loans are expected to continue to contract as the Corporation reduces its concentration in these types of loans to its corporate goal of 10% of total loans and leases. At June 30, 2009, construction and development loans were 14.2% of total loans and leases outstanding, which is down from the peak at September 30, 2007, when construction and development loans were 22.6% of total loans and leases outstanding. Commercial real estate loan growth in 2009 compared to 2008 is expected to be unchanged or relatively modest. Wealth management revenue will continue to be affected by market volatility and direction.
Management expects the prevailing economic and difficult real estate market conditions will last well into 2010 in many of the Corporation's markets. The Corporation expects that the bulk of the credit quality issues related to Florida have been realized. A weak and unstable economy and rising unemployment has resulted in increased stress in consumer loans, particularly consumer mortgage and home equity loans and lines of credit. The Corporation expects that the level of new larger construction loans placed on nonaccrual may be at or near their peak; however, nonaccrual consumer loans are expected to increase. As a result, total nonperforming loans and leases are expected to subside but remain at elevated levels in future quarters. The elevated levels are expected to be consistent with the level of nonperforming loans and leases experienced in the second quarter of 2009 reflecting the broader economic stress.
Management expects the provision for loan and lease losses will continue to be at elevated levels due to the recessionary economy and weak national real estate markets. The credit environment and underlying collateral values continue to be rapidly changing and, as a result, there are numerous unknown factors at this time that will ultimately affect the timing and amount of nonperforming loans and leases, net charge-offs and the provision for loan and lease losses that will be recognized in the remainder of 2009. The Corporation expects that the provision for loan and lease losses and net charge-offs in the third quarter of 2009 will be signficantly less than the provision for loan and lease losses and net charge-offs reported for the second quarter of 2009 due to the additional net charge-offs recorded for the predominately nonperforming residential loans that were classified as held for sale at June 30, 2009 as a result of the July 31, 2009 sale of those loans as discussed below. The timing and amount of charge-offs will continue to be influenced by the Corporation's strategies for managing its nonperforming loans and leases. If the economy and real estate markets deteriorate more than management currently expects, the Corporation will continue to experience increased levels of nonperforming assets, increased net charge-offs, a higher provision for loan and lease losses, lower net interest income and increased operating costs due to the expense associated with collection efforts and the operating expense of carrying nonperforming assets.
As previously noted, on July 31, 2009, the Corporation sold a pool of predominantly nonperforming residential loans with an unpaid principal balance of $296.7 million. These loans were classified as loans held for sale and charge-offs of $150.8 million were recognized at June 30, 2009.
The Corporation's actual results for the remainder of 2009 could differ materially from those expected by management. See "Forward-Looking Statements" in the Corporation's Annual Report on Form 10-K for the year ended December 31, 2008 for a discussion of the various risk factors that could cause actual results to differ materially from expected results.
Some of the other more noteworthy transactions and events that occurred in the six months ended June 30, 2009 and 2008, by quarter, consisted of the following:
Second Quarter 2009
During the second quarter of 2009, the Corporation recognized a gain of $35.4 million in conjunction with the sale of its Visa Class B common stock. Also during the second quarter, the Corporation realized a gain of $43.6 million from the sale of approximately $1.1 billion in aggregate principal amount of United States government agency investment securities. These gains are included in Net investment securities gains in the Consolidated Statements of Income. On an after-tax basis, these gains amounted to $49.8 million or $0.18 per diluted common share.
In the second quarter of 2009, the Corporation recognized a tax benefit of $18.0 million or $0.06 per diluted common share from a favorable resolution of a tax matter associated with a 2002 stock issuance.
During the second quarter of 2009, the Corporation recorded a special FDIC insurance assessment charge of $29.3 million. On an after-tax basis, the assessment amounted to $18.5 million or $0.07 per diluted common share.
On June 17, 2009, the Corporation announced the closing of its public offering of 100.0 million shares of its $1.00 par value common stock at $5.75 per share. The 100.0 million shares include 13.0 million shares issued pursuant to the option granted to the underwriters by the Corporation, which was exercised in full. The proceeds, net of underwriting discounts and commissions and offering expenses, from their issuance amounted to $551.8 million. In addition, under the initial shelf registration, the Corporation issued 670,300 shares of its common stock valued at $4.5 million, net of underwriting discounts and commissions and offering expenses.
On May 27, 2009, the Corporation acquired the investment team and managed accounts of Delta Asset Management ("Delta"), an institutional large-cap core equity money manager based in Los Angeles, California. Delta, an operating division of Berkeley Capital Management LLC, had approximately $1.2 billion in assets under management as of April 30, 2009.
First Quarter 2009
The State of Wisconsin enacted legislation that requires combined reporting for state income tax purposes. As a result, the Corporation recorded an additional income tax benefit of $51.0 million, or $0.19 per diluted common share to recognize certain state deferred tax assets, which included the reduction of a valuation allowance for Wisconsin net operating losses. The Corporation expects that income tax expense will increase in future periods due to the enacted legislation.
First Quarter 2008
On January 2, 2008, the Corporation completed its acquisition of First Indiana Corporation ("First Indiana").
During the first quarter of 2008, the Corporation recognized income of $39.1 million due to the completion of the initial public offering ("IPO") by Visa. As a result of the IPO, Visa redeemed 38.7% of the Class B Visa common stock owned by the Corporation. The gain from the redemption amounted to $26.9 million and is reported in Net investment securities gains in the Consolidated Statements of Income. In addition, Visa established an escrow for certain litigation matters from the proceeds of the IPO. As a result of the funded escrow, the Corporation reversed $12.2 million of the litigation accruals that were originally recorded due to the Corporation's membership interests in Visa which is reported in Other expense in the Consolidated Statements of Income. On an after-tax basis, these two Visa-related items increased net income by approximately $25.4 million or $0.10 per diluted common share.
During the first quarter of 2008, the Corporation recognized an additional income tax benefit of approximately $20.0 million, or $0.08 per diluted common share, related to how the TEFRA (interest expense) disallowance should be calculated within a consolidated group.
Net interest income is the difference between interest income on earning assets and interest expense on interest bearing liabilities.
Net interest income for the second quarter of 2009 amounted to $391.8 million compared to $447.6 million reported for the second quarter of 2008, a decrease of $55.8 million or 12.5%. For the six months ended June 30, 2009, net interest income amounted to $793.6 million compared to $878.0 million for the six months ended June 30, 2008, a decrease of $84.4 million or 9.6%. During the past year, net interest income has been under pressure as interest rates on earning assets have declined more rapidly than the rates paid for interest bearing liabilities. The Corporation's inability to continue to lower deposit pricing in the low interest rate environment due to competition for deposits and a shift in deposit mix to higher cost deposits has contributed to lower net interest income. In addition, net interest income has been compressed as a result of higher levels of nonperforming loans and leases and interest rate concessions associated with renegotiated loans.
Average earning assets decreased $1.0 billion or 1.7% in the second quarter of 2009 compared to the second quarter of 2008. A decline in average loans and leases accounted for substantially all of the decline in average earning assets in the three months ended June 30, 2009 compared to the three months ended June 30, 2008.
Average interest bearing liabilities decreased $3.5 billion or 7.1% in the second quarter of 2009 compared to the second quarter of 2008, and amounted to $46.1 billion for the second quarter of 2009. Average interest bearing deposits decreased $0.7 billion or 2.2% in the second quarter of 2009 compared to the second quarter of 2008. Average short-term borrowings decreased $2.6 billion or 38.1% in the second quarter of 2009 compared to the same period in 2008. Average long-term borrowings decreased $0.2 billion or 2.1% in the second quarter of 2009 compared to the second quarter of 2008. During the second quarter of 2009, the Corporation re-acquired and extinguished $218.7 million of long-term borrowings.
Average noninterest bearing deposits increased approximately $1.5 billion or 26.2% in the three months ended June 30, 2009 compared to the three months ended June 30, 2008.
For the six months ended June 30, 2009, average earning assets amounted to $57.9 billion compared to $57.6 billion for the six months ended June 30, 2008, an increase of $0.3 billion or 0.6%. An increase in average short-term investments and trading assets accounted for the majority of the increase in the first half of 2009 over the first half of 2008.
Average interest bearing liabilities decreased $1.8 billion or 3.6% in the six months ended June 30, 2009 compared to the six months ended June 30, 2008. Average interest bearing deposits increased $0.2 billion or 0.6% in the six months ended June 30, 2009 compared to the six months ended June 30, 2008. Average short-term borrowings declined approximately $1.7 billion or 24.9% in the first half of 2009 compared to the same period in 2008. Average long-term borrowings decreased $0.3 billion or 3.3% in the six months ended June 30, 2009 compared to the six months ended June 30, 2008. During the first half of 2009, the Corporation re-acquired and extinguished approximately $260.8 million of long-term borrowings.
For the six months ended June 30, 2009 compared to the six months ended June 30, 2008, average noninterest bearing deposits increased $1.2 billion or 20.8%.
The growth and composition of the Corporation's quarterly average loan and lease portfolio for the current quarter and previous four quarters are reflected in the following table ($ in millions):
Consolidated Average Loans and Leases
2009 2008 Growth Percent
Second First Fourth Third Second Prior
Quarter Quarter Quarter Quarter Quarter Annual Quarter
Commercial:
Commercial $ 14,404 $ 14,745 $ 14,888 $ 15,002 $ 15,086 (4.5 ) % (2.3 ) %
Commercial lease
financing 522 547 534 511 517 1.0 (4.6 )
Total commercial
loans and leases 14,926 15,292 15,422 15,513 15,603 (4.3 ) (2.4 )
Commercial real
estate 13,549 12,872 12,203 11,942 11,703 15.8 5.3
Residential real
estate 5,695 5,768 5,675 5,631 5,525 3.1 (1.3 )
Construction and
development:
Commercial
Construction 3,290 3,966 4,577 4,433 4,431 (25.7 ) (17.0 )
Land 898 854 913 986 992 (9.5 ) 5.2
Commercial
construction and
development 4,188 4,820 5,490 5,419 5,423 (22.8 ) (13.1 )
Residential
. . .
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