1
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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, 2006
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 1-15403
MARSHALL & ILSLEY CORPORATION
(Exact name of registrant as specified in its charter)
Wisconsin 39-0968604
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
770 North Water Street
Milwaukee, Wisconsin 53202
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (414) 765-7801
None
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated filer. See
definition of "accelerated filer and large accelerated filer" in Rule 12b-
2 of the Exchange Act. (Check one): Large accelerated filer [X]
Accelerated filer [ ] Non-accelerated filer [ ]
Indicate by check mark whether the registrant is a shell company
(as defined by Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Outstanding at
Class April 30, 2006
----- ----------------
Common Stock, $1.00 Par Value 253,142,886
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2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MARSHALL & ILSLEY CORPORATION
CONSOLIDATED BALANCE SHEETS (Unaudited)
($000's except share data)
As Adjusted Note 11
---------------------------
March 31, December 31, March 31,
2006 2005 2005
-------------- ------------- --------------
Assets
------
Cash and cash equivalents:
Cash and due from banks $ 1,017,005 $ 1,155,263 $ 873,102
Federal funds sold and security resale agreements 111,498 209,869 86,822
Money market funds 32,065 49,219 53,594
------------- ------------- -------------
Total cash and cash equivalents 1,160,568 1,414,351 1,013,518
Investment securities:
Trading securities, at market value 40,373 29,779 24,379
Interest bearing deposits at other banks 15,766 40,659 17,272
Available for sale, at market value 6,039,645 5,701,703 5,459,388
Held to maturity, market value $603,665
($638,135 December 31, 2005 and $730,046 March 31, 2005) 587,090 618,554 698,826
------------- ------------- -------------
Total investment securities 6,682,874 6,390,695 6,199,865
Loans held for sale 159,117 277,847 135,006
Loans and leases:
Loans and leases, net of unearned income 35,033,614 33,889,066 30,447,652
Less: Allowance for loan and lease losses 368,760 363,769 358,280
------------- ------------- -------------
Net loans and leases 34,664,854 33,525,297 30,089,372
Premises and equipment, net 500,261 490,687 444,702
Goodwill and other intangibles 2,483,873 2,461,461 2,152,116
Accrued interest and other assets 1,683,034 1,652,379 1,605,942
------------- ------------- -------------
Total Assets $ 47,334,581 $ 46,212,717 $ 41,640,521
============= ============= =============
Liabilities and Shareholders' Equity
------------------------------------
Deposits:
Noninterest bearing $ 4,999,788 $ 5,525,019 $ 4,789,802
Interest bearing 23,093,375 22,149,202 20,911,906
------------- ------------- -------------
Total deposits 28,093,163 27,674,221 25,701,708
Federal funds purchased and
security repurchase agreements 2,673,095 2,327,258 1,868,291
Other short-term borrowings 2,879,727 3,299,476 2,588,041
Accrued expenses and other liabilities 1,616,073 1,507,621 1,504,752
Long-term borrowings 7,185,939 6,668,670 5,892,119
------------- ------------- -------------
Total liabilities 42,447,997 41,477,246 37,554,911
Shareholders' equity:
Series A convertible preferred stock, $1.00 par value;
2,000,000 shares authorized -- -- --
Common stock, $1.00 par value; 245,115,086 shares issued
(244,587,222 shares at December 31, 2005 and 244,432,222
shares at March 31, 2005) 245,115 244,587 244,432
Additional paid-in capital 1,003,367 970,739 864,840
Retained earnings 4,002,008 3,871,614 3,497,731
Accumulated other comprehensive income,
net of related taxes (43,742) (37,291) (16,353)
Less: Treasury stock, at cost: 9,029,759 shares
(9,148,493 December 31, 2005 and
15,689,406 March 31, 2006) 284,323 277,423 475,719
Deferred compensation 35,841 36,755 29,321
------------- ------------- -------------
Total shareholders' equity 4,886,584 4,735,471 4,085,610
------------- ------------- -------------
Total Liabilities and Shareholders' Equity $ 47,334,581 $ 46,212,717 $ 41,640,521
============= ============= =============
See notes to financial statements.
3
MARSHALL & ILSLEY CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
($000's except per share data)
As Adjusted
Note 11
---------------
Three Months Three Months
Ended March 31, Ended March 31,
2006 2005
--------------- ---------------
Interest and fee income
-----------------------
Loans and leases $ 588,883 $ 423,921
Investment securities:
Taxable 57,868 51,943
Exempt from federal income taxes 15,999 15,407
Trading securities 70 69
Short-term investments 3,565 1,344
------------- -------------
Total interest and fee income 666,385 492,684
Interest expense
----------------
Deposits 198,126 103,490
Short-term borrowings 39,335 21,962
Long-term borrowings 104,344 68,374
------------- -------------
Total interest expense 341,805 193,826
------------- -------------
Net interest income 324,580 298,858
Provision for loan and lease losses 10,995 8,126
------------- -------------
Net interest income after provision for loan and lease losses 313,585 290,732
Other income
------------
Data processing services 342,980 282,934
Trust services 45,945 40,346
Service charges on deposits 22,772 23,570
Gains on sale of mortgage loans 10,741 6,937
Other mortgage banking revenue 1,714 1,243
Net investment securities gains (losses) 1,052 5,849
Life insurance revenue 6,966 6,209
Other 40,600 35,369
------------- -------------
Total other income 472,770 402,457
Other expense
-------------
Salaries and employee benefits 277,403 245,076
Net occupancy 24,881 22,364
Equipment 32,939 31,010
Software expenses 17,438 13,352
Processing charges 27,013 14,925
Supplies and printing 6,122 6,496
Professional services 11,449 10,886
Shipping and handling 23,902 19,635
Amortization of intangibles 8,875 8,092
Other 75,111 71,155
------------- -------------
Total other expense 505,133 442,991
------------- -------------
Income before income taxes 281,222 250,198
Provision for income taxes 94,454 84,882
------------- -------------
Net income $ 186,768 $ 165,316
============= =============
Net income per common share
---------------------------
Basic $ 0.79 $ 0.73
Diluted 0.78 0.71
Dividends paid per common share $ 0.240 $ 0.210
Weighted average common shares outstanding (000's):
---------------------------------------------------
Basic 235,317 227,557
Diluted 240,343 232,788
See notes to financial statements.
4
MARSHALL & ILSLEY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
($000's)
Three Months Ended March 31,
--------------------------------
2006 2005
--------------- ---------------
Net Cash Provided by Operating Activities $ 225,770 $ 178,844
Cash Flows From Investing Activities:
Proceeds from sales of securities available for sale 5,449 16,286
Proceeds from maturities of securities available for sale 267,997 260,792
Proceeds from maturities of securities held to maturity 31,788 27,412
Purchases of securities available for sale (382,317) (445,348)
Net increase in loans (1,196,779) (1,058,364)
Purchases of assets to be leased (36,680) (43,929)
Principal payments on lease receivables 52,418 48,682
(Purchases) Sales of premises and equipment, net (27,858) 4,812
Acquisitions, net of cash and cash equivalents acquired (1,462) (12,308)
Other (4,933) 4,038
------------- -------------
Net cash used in investing activities (1,292,377) (1,197,927)
Cash Flows From Financing Activities:
Net increase (decrease) in deposits 437,890 (733,197)
Proceeds from issuance of commercial paper 901,035 1,352,463
Principal payments on commercial paper (968,228) (1,366,906)
Net increase in other short-term borrowings 44,827 699,661
Proceeds from issuance of long-term borrowings 750,000 1,153,537
Payments of long-term borrowings (271,038) (21,832)
Dividends paid (56,374) (47,798)
Purchases of common stock (41,788) --
Proceeds from exercise of stock options 19,101 11,134
Other (2,601) (2,599)
------------- -------------
Net cash provided by financing activities 812,824 1,044,463
------------- -------------
Net (decrease) increase in cash and cash equivalents (253,783) 25,380
Cash and cash equivalents, beginning of year 1,414,351 988,138
------------- -------------
Cash and cash equivalents, end of period $ 1,160,568 $ 1,013,518
============= =============
Supplemental cash flow information:
-----------------------------------
Cash paid during the period for:
Interest $ 344,307 $ 186,011
Income taxes 9,408 11,394
See notes to financial statements.
5
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements
March 31, 2006 & 2005 (Unaudited)
1. The accompanying unaudited consolidated financial statements should be
read in conjunction with Marshall & Ilsley Corporation's ("M&I" or
"Corporation") Annual Report on Form 10-K for the year ended December
31, 2005. The unaudited financial information included in this report
reflects all adjustments consisting of normal recurring accruals and the
adjustments as discussed in Note 11 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, 2006 and 2005. The results of
operations for the three months ended March 31, 2006 and 2005 are not
necessarily indicative of results to be expected for the entire year.
Certain amounts in the 2005 consolidated financial statements and
analyses have been reclassified to conform with the 2006 presentation.
2. New Accounting Pronouncements
In March 2006, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 156, Accounting for
Servicing of Financial Assets - an amendment of FASB Statement No. 140
("SFAS 156"). This statement amends FASB No. 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities. This statement requires an entity to recognize a servicing
asset or servicing liability each time it undertakes an obligation to
service a financial asset by entering into a servicing contract in
certain situations. SFAS 156 requires that all separately recognized
servicing assets and servicing liabilities be initially measured at fair
value, if practicable. This statement permits the subsequent
measurement of servicing assets and servicing liabilities using either a
fair value method or an amortization method. The standard permits a
one-time reclassification of available-for-sale securities to trading
securities by entities with recognized servicing rights, without calling
into question the treatment of other available-for-sale securities under
Statement 115, provided that the available-for-sale securities are
identified in some manner as offsetting the entity's exposure to changes
in fair value of servicing assets or servicing liabilities that a
servicer elects to subsequently measure at fair value. The Corporation
will be required to adopt SFAS 156 beginning January 1, 2007.
Management believes that the adoption of this standard will not have a
material impact on the Corporation's results of operations or financial
position.
In February 2006, the FASB issued Statement of Financial Accounting
Standards No. 155, Accounting for Certain Hybrid Financial Instruments -
an amendment of FASB Statements No. 133 and 140 ("SFAS 155"). This
statement amends FASB Statements No. 133, Accounting for Derivative
Instruments and Hedging Activities, and No. 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities. SFAS 155 permits fair value remeasurement for any hybrid
financial instrument that contains an embedded derivative that otherwise
would require bifurcation. This statement will require the Corporation
to evaluate interests in securitized financial assets to identify
interests that are freestanding derivatives or that are hybrid financial
instruments that contain an embedded derivative requiring bifurcation.
The amended rule also clarifies which interest-only strips and
principal-only strips are not subject to the requirements of SFAS 133
and further clarifies that concentrations of credit risk in the form of
subordination are not embedded derivatives. SFAS 155 amends Statement
No. 140 to eliminate the prohibition on a qualifying special-purpose
entity from holding a derivative financial instrument that pertains to a
beneficial interest other than another derivative financial instrument.
The Corporation will be required to adopt SFAS 155 for all financial
instruments acquired or issued after January 1, 2007. Management
believes that the adoption of this standard will not have a material
impact on the Corporation's results of operations or financial position.
6
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
March 31, 2006 & 2005 (Unaudited)
3. Comprehensive Income
The following tables present the Corporation's comprehensive income
(000's):
Three Months Ended March 31, 2006
------------------------------------------
Before-Tax Tax (Expense) Net-of-Tax
Amount Benefit Amount
------------- ------------- ------------
Net income $ 186,768
Other comprehensive income:
Unrealized gains (losses) on securities:
Arising during the period $ (15,924) $ 5,596 (10,328)
Reclassification for securities
transactions included in net income (448) 157 (291)
------------ ------------ -----------
Unrealized gains (losses) (16,372) 5,753 (10,619)
Net gains (losses) on derivatives
hedging variability of cash flows:
Arising during the period 8,337 (2,918) 5,419
Reclassification adjustments for
hedging activities included in net income (1,925) 674 (1,251)
------------ ------------ -----------
Net gains (losses) $ 6,412 $ (2,244) 4,168
------------ ------------ -----------
Other comprehensive income (loss) (6,451)
-----------
Total comprehensive income $ 180,317
===========
Three Months Ended March 31, 2005
------------------------------------------
Before-Tax Tax (Expense) Net-of-Tax
Amount Benefit Amount
------------- ------------- ------------
Net income $ 165,316
Other comprehensive income:
Unrealized gains (losses) on securities:
Arising during the period $ (75,719) $ 26,739 (48,980)
Reclassification for securities
transactions included in net income 26 (9) 17
------------ ------------ -----------
Unrealized gains (losses) (75,693) 26,730 (48,963)
Net gains (losses) on derivatives
hedging variability of cash flows:
Arising during the period 11,191 (3,917) 7,274
Reclassification adjustments for
hedging activities included in net income 3,074 (1,076) 1,998
------------ ------------ -----------
Net gains (losses) $ 14,265 $ (4,993) 9,272
------------ ------------ -----------
Other comprehensive income (loss) (39,691)
-----------
Total comprehensive income $ 125,625
===========
7
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
March 31, 2006 & 2005 (Unaudited)
4. A reconciliation of the numerators and denominators of the basic and
diluted per share computations are as follows (dollars and shares in
thousands, except per share data):
Three Months Ended March 31, 2006
-------------------------------------------
Income Average Shares Per Share
(Numerator) (Denominator) Amount
------------- ---------------- ------------
Basic Earnings Per Share
Income Available to Common Shareholders $ 186,768 235,317 $ 0.79
===========
Effect of Dilutive Securities
Stock Options, Restricted Stock
and Other Plans -- 5,026
------------ ---------------
Diluted Earnings Per Share
Income Available to Common Shareholders $ 186,768 240,343 $ 0.78
===========
Three Months Ended March 31, 2005
-------------------------------------------
Income Average Shares Per Share
(Numerator) (Denominator) Amount
------------- ---------------- ------------
Basic Earnings Per Share
Income Available to Common Shareholders $ 165,316 227,557 $ 0.73
===========
Effect of Dilutive Securities
Stock Options, Restricted Stock
and Other Plans -- 5,231
------------ ---------------
Diluted Earnings Per Share
Income Available to Common Shareholders $ 165,316 232,788 $ 0.71
===========
Options to purchase shares of common stock not included in the
computation of diluted net income per share because the stock options
were antidilutive are as follows (shares in thousands):
Three Months Ended March 31,
---------------------------------------
2006 2005
------------------ -----------------
Shares 118 3,358
Price Range $43.310 - $47.020 $41.870 - $44.200
5. Business Combinations
The following acquisitions, which are not considered to be material
business combinations individually or in the aggregate, were completed
during the first quarter of 2006:
On January 3, 2006, Marshall & Ilsley Trust Company N.A., completed the
acquisition of the trust and asset management business assets of
FirstTrust Indiana of Indianapolis, Indiana, a division of First Indiana
Bank, N.A. ("FirstTrust Indiana"). The total cash consideration was
$15.9 million. Additional consideration up to $1.5 million may be paid
over three years based on business growth and retention. FirstTrust
Indiana offers asset management, trust administration and estate
planning services to high net-worth individuals and institutional
customers. Initial goodwill, subject to the completion of appraisals
and valuation of the assets acquired and liabilities assumed, amounted
to $13.4 million. The estimated identifiable intangible asset to be
amortized (trust customers) with an estimated weighted average life of
5.9 years amounted to $2.0 million. The goodwill and intangibles
resulting from this transaction are deductible for tax purposes.
8
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
March 31, 2006 & 2005 (Unaudited)
On January 3, 2006, Metavante completed the acquisition of AdminiSource
Corporation ("AdminiSource") of Carrollton, Texas. AdminiSource is a
provider of health care payment distribution services, providing printed
and electronic payment and remittance advice distribution services for
payer organizations nationwide. Total consideration in this transaction
consisted of 527,864 shares of M&I common stock valued at $23.2 million
and $5.0 million in cash. Initial goodwill, subject to the completion
of appraisals and valuation of the assets acquired and liabilities
assumed, amounted to $21.1 million. The estimated identifiable
intangible asset to be amortized (customer relationships) with an
estimated useful life of 10 years amounted to $8.5 million. The
goodwill and intangibles resulting from this transaction are not
deductible for tax purposes.
Recent acquisition activities
-----------------------------
On April 1, 2006, Marshall & Ilsley Corporation completed the
acquisition of Trustcorp Financial, Inc. ("Trustcorp"). With the
acquisition of Trustcorp, which had consolidated assets of $735.7
million at March 31, 2006, the Corporation acquired Missouri State Bank
and Trust Company, which provides commercial banking services in
Missouri through seven bank locations. Trustcorp shareholders received
0.7011 of a share of M&I common stock and $7.70 in cash for each share
of Trustcorp common stock they own. M&I did not issue any fractional
shares in the merger. Instead, Trustcorp shareholders received cash in
lieu of any fractional share of M&I common stock based on a value for
each M&I share of $43.93. Total transaction value was approximately
$181 million.
On April 1, 2006, Marshall & Ilsley Corporation completed the
acquisition of Gold Banc Corporation, Inc. ("Gold Banc"), a bank holding
company headquartered in Leawood, Kansas, which offers commercial
banking, retail banking, trust and asset management products and
services through various subsidiaries. As of March 31, 2006, Gold Banc,
had consolidated assets of $4.2 billion. Gold Banc's largest
subsidiary, Gold Bank, a Kansas state-chartered bank, was merged with
and into M&I Marshall & Ilsley Bank on April 1, 2006, at which time, the
32 Gold Bank branch offices in Florida, Kansas, Missouri and Oklahoma
became interstate branch offices of M&I Marshall & Ilsley Bank.
6. Selected investment securities, by type, held by the Corporation were as
follows ($000's):
March 31, December 31, March 31,
2006 2005 2005
-------------- -------------- --------------
Investment securities available for sale:
U.S. treasury and government agencies $ 4,708,218 $ 4,379,148 $ 4,219,316
State and political subdivisions 719,194 703,892 571,387
Mortgage backed securities 110,252 116,464 142,310
Other 501,981 502,199 526,375
------------- ------------- -------------
Total $ 6,039,645 $ 5,701,703 $ 5,459,388
============= ============= =============
Investment securities held to maturity:
State and political subdivisions $ 585,090 $ 616,554 $ 696,526
Other 2,000 2,000 2,300
------------- ------------- -------------
Total $ 587,090 $ 618,554 $ 698,826
============= ============= =============
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, 2006 ($000's):
Less than 12 Months 12 Months or More Total
--------------------------- --------------------------- ---------------------------
Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
------------- ------------- ------------- ------------- ------------- -------------
U.S. treasury and
government agencies $ 2,121,289 $ 36,196 $ 1,999,862 $ 59,897 $ 4,121,151 $ 96,093
State and political subdivision 115,486 1,636 82,276 2,004 197,762 3,640
Mortgage backed securities 40,167 705 70,085 2,532 110,252 3,237
------------ ------------ ------------ ------------ ------------ ------------
Total $ 2,276,942 $ 38,537 $ 2,152,223 $ 64,433 $ 4,429,165 $ 102,970
============ ============ ============ ============ ============ ============
9
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
March 31, 2006 & 2005 (Unaudited)
The investment securities in the above table were temporarily impaired
at March 31, 2006. This temporary impairment represents the amount of
loss that would have been realized if the investment securities had been
sold on March 31, 2006. The temporary impairment in the investment
securities portfolio is predominantly the result of increases in market
interest rates since the investment securities were acquired and not
from deterioration in the creditworthiness of the issuer.
7. The Corporation's loan and lease portfolio, including loans held for
sale, consisted of the following ($000's):
March 31, December 31, March 31,
2006 2005 2005
-------------- -------------- --------------
Commercial, financial and agricultural $ 10,244,761 $ 9,599,361 $ 8,708,376
Cash flow hedging instruments at fair value (47,220) (33,886) (28,333)
------------- ------------- -------------
Commercial, financial and agricultural 10,197,541 9,565,475 8,680,043
Real estate:
Construction 4,054,364 3,641,942 2,565,783
Residential mortgage 5,370,353 5,050,803 3,764,515
Home equity loans and lines of credit 4,606,136 4,833,480 5,161,915
Commercial mortgage 8,819,281 8,825,104 8,412,078
------------- ------------- -------------
Total real estate 22,850,134 22,351,329 19,904,291
Personal 1,518,828 1,617,761 1,456,111
Lease financing 626,228 632,348 542,213
------------- ------------- -------------
Total loans and leases $ 35,192,731 $ 34,166,913 $ 30,582,658
============= ============= =============
8. Financial Asset Sales
During the first quarter of 2006, automobile loans with principal
balances of $154.7 million were sold in securitization transactions.
Net gains of $0.1 million were recognized and are reported in Other
income in the Consolidated Statements of Income. Other income
associated with auto securitizations, primarily servicing income,
amounted to a $1.9 million in the current quarter.
Key economic assumptions used in measuring the retained interests at the
date of securitization resulting from securitizations completed during
the quarter were as follows (rate per annum):
Prepayment speed (CPR) 17-42 %
Weighted average life (in months) 20.3
Expected credit losses (based on original balance) 0.36-1.03 %
Residual cash flow discount rate 12.0 %
Variable returns to transferees Forward one-month
LIBOR yield curve
At March 31, 2006, securitized automobile loans and other automobile
loans managed together with them, along with delinquency and credit loss
information consisted of the following ($000's):
Total
Securitized Portfolio Managed
-------------- -------------- --------------
Loan balances $ 984,997 $ 173,736 $ 1,158,733
Principal amounts of loans 60 days or more past due 1,098 661 1,759
Net credit losses year to date 631 570 1,201
10
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
March 31, 2006 & 2005 (Unaudited)
9. Goodwill and Other Intangibles
The changes in the carrying amount of goodwill for the three months
ended March 31, 2006 were as follows ($000's):
Banking Metavante Others Total
------------- ------------- ------------- -------------
Goodwill balance as of January 1, 2006 $ 809,376 $ 1,272,039 $ 7,804 $ 2,089,219
Goodwill acquired during the period -- 21,096 13,367 34,463
Purchase accounting adjustments (121) (20,457) -- (20,578)
------------ ------------ ------------ ------------
Goodwill balance as of March 31, 2006 $ 809,255 $ 1,272,678 $ 21,171 $ 2,103,104
============ ============ ============ ============
Goodwill acquired for the Metavante segment includes initial goodwill
relating to the acquisition of AdminiSource in the first quarter of
2006. Goodwill for the Others segment includes initial goodwill
relating to the acquisition of FirstTrust Indiana in the first quarter
of 2006.
Purchase accounting adjustments for Metavante for the three months ended
March 31, 2006 represent adjustments made to the initial estimates of
fair value associated with the acquisitions of Med-i-Bank, Inc.,
LINK2GOV Corp. and NYCE Corporation ("NYCE") and its affiliate
companies. During the first quarter, Metavante received $29.9 million
as a return of the purchase price associated with the NYCE acquisition.
Purchase accounting adjustments for the Banking segment was attributable
to the reduction of goodwill allocated to a branch divestiture.
At March 31, 2006, the Corporation's other intangible assets consisted
of the following ($000's):
March 31, 2006
-------------------------------------------
Accum-
Gross ulated Net
Carrying Amort- Carrying
Amount ization Value
------------- ------------- -------------
Other intangible assets
-----------------------
Core deposit intangible $ 152,816 $ 81,773 $ 71,043
Data processing contract rights/customer lists 332,372 38,831 293,541
Trust customers 6,750 1,405 5,345
Tradename 8,275 873 7,402
Other Intangibles 1,250 483 767
------------ ------------ ------------
$ 501,463 $ 123,365 $ 378,098
============ ============ ============
Mortgage loan servicing rights $ 2,671
============
Amortization expense of other intangible assets for the three months
ended March 31, 2006 and 2005 amounted to $8.9 million and $8.1 million,
respectively.
The estimated amortization expense of other intangible assets and
mortgage loan servicing rights for the next five annual fiscal years are
($000's):
2006 $ 35,283
2007 33,192
2008 31,352
2009 30,146
2010 29,183
11
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
March 31, 2006 & 2005 (Unaudited)
10. The Corporation's deposit liabilities consisted of the following
($000's):
March 31, December 31, March 31,
2006 2005 2005
-------------- -------------- --------------
Noninterest bearing demand $ 4,999,788 $ 5,525,019 $ 4,789,802
Savings and NOW 10,265,748 10,462,831 10,104,075
Cash flow hedge-Brokered MMDA (5,820) (5,326) (4,774)
------------- ------------- -------------
Total Savings and NOW 10,259,928 10,457,505 10,099,301
CD's $100,000 and over 7,018,466 5,652,359 5,672,869
Cash flow hedge-Institutional CDs (17,653) (13,767) (23,652)
------------- ------------- -------------
Total CD's $100,000 and over 7,000,813 5,638,592 5,649,217
Other time deposits 3,602,642 3,434,476 2,884,075
Foreign deposits 2,229,992 2,618,629 2,279,313
------------- ------------- -------------
Total deposits $ 28,093,163 $ 27,674,221 $ 25,701,708
============= ============= =============
11. Share-Based Compensation Plans
The Corporation has Equity Incentive Plans which provide for the grant
of nonqualified and incentive stock options, stock appreciation rights,
rights to purchase shares of restricted stock and the award of
restricted stock units to key employees and directors of the Corporation
at prices ranging from zero to the market value of the shares at the
date of grant. The Equity Incentive Plans generally provide for the
grant of options to purchase shares of the Corporation's common stock
for a period of ten years from the date of grant. Stock options granted
generally become exercisable over a period of three years from the date
of grant. However, stock options granted to directors of the
Corporation vest immediately and stock options granted after 1996
provide accelerated or immediate vesting for grants to individuals who
meet certain age and years of service criteria at the date of grant.
Restrictions on stock or units issued pursuant to the Equity Incentive
Plans generally lapse within a three to seven year period.
The Corporation also has a Long-Term Incentive Plan. Under the plan,
performance units may be awarded from time to time. Once awarded,
additional performance units will be credited to each participant based
on dividends paid by the Corporation on its common stock. At the end of
a designated vesting period, participants will receive a cash award
equal to the Corporation's average common stock price over the last five
days of the vesting period multiplied by some percent (0%-275%) of the
initial performance units credited plus those additional units credited
as dividends based on the established performance criteria. The vesting
period is three years from the date the performance units were awarded.
The Corporation also has a qualified employee stock purchase plan (the
"ESPP") which gives employees, who elect to participate in the plan, the
right to acquire shares of the Corporation's common stock at the
purchase price which is 85 percent of the lesser of the fair market
value of the Corporation's common stock on the first or last day of the
one-year offering period which has historically been from July 1 to June
30.
Effective January 1, 2006, the Corporation adopted Statement of
Financial Accounting Standard No. 123 (revised 2004), Share-Based
Payment ("SFAS 123(R)"). SFAS 123(R) replaces FASB Statement No. 123
Accounting for Stock-Based Compensation ("SFAS 123"), and supercedes
Accounting Principles Board Opinion No. 25 ("APBO 25") Accounting for
Stock Issued to Employees. Statement 123(R) requires that compensation
cost relating to share-based payment transactions be recognized in
financial statements. That cost is measured based on the fair value of
the equity or liability instruments issued. Statement 123(R) covers a
wide range of share-based compensation arrangements including stock
options, restricted stock plans, performance-based awards, stock
appreciation rights, and employee stock purchase plans. Statement 123(R)
also provides guidance on measuring the fair value of share-based
payments awards.
The Corporation elected the Modified Retrospective Application method to
implement this new accounting standard. Under that method compensation
cost is recognized beginning on the effective date based upon (a) the
requirements of SFAS 123(R) for all share-based payments granted after
the effective date and (b) the fair value method of accounting
provisions of SFAS 123 for all awards granted to employees prior to the
effective date of SFAS 123(R) that remain unvested on the effective
date.
12
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
March 31, 2006 & 2005 (Unaudited)
As permitted under SFAS 123, the Corporation previously recognized
compensation cost using the intrinsic value method of accounting
prescribed in APBO 25. Under the intrinsic value method, compensation
cost is the excess, if any, of the quoted market price of the stock at
grant date or other measurement date over the amount paid to acquire the
stock. Under APBO 25 no compensation cost was recognized for the
nonqualified and incentive stock option plans because the exercise price
was equal to the quoted market price at the date of grant and therefore,
there is no intrinsic value. Under APBO 25 no compensation cost was
recognized for the Corporation's ESPP because the discount (15%) and the
plan meets the definition of a qualified plan of the Internal Revenue
Code and met the requirements of APBO 25.
Under the fair value method of accounting, compensation cost is measured
at the grant date based on the fair value of the award using an option-
pricing model that takes into account the stock price at the grant date,
the exercise price, the expected life of the option, the volatility of
the underlying stock, expected dividends and the risk-free interest rate
over the expected life of the option. The resulting compensation cost
for stock options that vest is recognized over the service period, which
is usually the vesting period. The fair value method of accounting
provided under SFAS 123 is generally similar to the fair value method of
accounting under SFAS 123(R).
Under the Modified Retrospective Application method, in addition to
recognizing compensation cost beginning on the effective date, financial
statements prior to the effective date have been adjusted based on pro
forma amounts previously disclosed under SFAS 123 for all periods for
which SFAS 123 was effective.
The impact to Shareholders' equity as a result of applying the Modified
Retrospective Application method to adopt SFAS 123(R) is as follows
($000's):
December 31, March 31,
2005 2005
------------- -------------
Decrease to Retained Earnings $ (149,544) $ (132,528)
Increase to Additional Paid-in Capital 217,205 195,736
------------ ------------
Net Increase to Shareholders' equity $ 67,661 $ 63,208
============ ============
The net increase to Shareholders' equity represents the deferred income
tax benefit outstanding associated with the cumulative effect on net
income from January 1, 1995 to December 31, 2005 and March 31, 2005,
respectively, from recognizing share-based compensation previously not
reported.
The cost for the ESPP and stock options granted after January 1, 1995
determined in accordance with the fair value method of accounting, the
Corporation's net income and earnings per share as adjusted is as
follows for the three months ended March 31, 2005 ($000's except per
share data):
Net Income, as originally reported $ 169,580
Less: Stock-based employee compensation
expense previously not included in net
income under the intrinsic method of
accounting, net of tax (4,264)
---------
Restated net income $ 165,316
=========
Basic earnings per share:
As originally reported $ 0.75
Restated 0.73
Diluted earnings per share:
As originally reported $ 0.73
Restated 0.71
13
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
March 31, 2006 & 2005 (Unaudited)
The Consolidated Statements of Cash Flows was not materially impacted.
Activity relating to nonqualified and incentive stock options for the
three months ended March 31, 2006 and 2005 was:
Weighted-
Average
Number Option Price Exercise
of Shares Per Share Price
------------ --------------- -----------
Shares under option at December 31, 2004 22,878,097 $10.13 - 44.20 $30.70
Options granted 50,500 40.49 - 43.53 42.12
Options lapsed or surrendered (71,524) 22.80 - 41.95 37.45
Options exercised (476,847) 10.13 - 41.95 23.35
------------ --------------- -----------
Shares under option at March 31, 2005 22,380,226 $10.13 - 44.20 $30.86
============ =============== ===========
Shares under option at December 31, 2005 24,655,317 $15.94 - 47.02 $33.09
Options granted 71,900 41.30 - 45.35 43.51
Options lapsed or surrendered (173,254) 34.79 - 42.82 41.41
Options exercised (747,680) 15.94 - 41.95 25.75
------------ --------------- -----------
Shares under option at March 31, 2006 23,806,283 $15.94 - 47.02 $33.30
============ =============== ===========
Stock option awards to directors of the Corporation generally occur
during the second quarter and stock option awards to employees primarily
occur in the fourth quarter. Generally, the Corporation uses shares of
treasury stock to satisfy stock options exercised.
The ranges of nonqualified and incentive stock options outstanding at
March 31, 2006 were:
Weighted-Average
Weighted-Average Remaining
Weighted-Average Aggregate Contractual
Number of Shares Exercise Price Intrinsic Value Life (In Years)
----------------------- ------------------- ------------------- -------------------
Out- Exer- Out- Exer- Out- Exer- Out- Exer-
Price Range standing cisable standing cisable standing cisable standing cisable
-------------- ----------- ----------- --------- --------- --------- --------- --------- ---------
$15.00 - 23.99 2,445,168 2,445,168 $21.26 $21.26 $22.32 $22.32 4.1 4.1
24.00 - 27.99 1,721,636 1,721,636 25.83 25.83 17.75 17.75 3.1 3.1
28.00 - 29.99 4,210,538 4,201,120 28.58 28.57 15.00 15.01 5.4 5.4
30.00 - 32.99 4,840,154 4,812,601 31.41 31.42 12.17 12.16 4.9 4.9
33.00 - 35.99 3,131,982 2,314,320 34.77 34.76 8.81 8.82 7.5 7.5
36.00 - 41.99 3,658,850 1,706,972 41.59 41.43 1.99 2.15 8.5 8.5
Over $42.00 3,797,955 546,625 42.86 42.82 0.72 0.76 9.6 9.6
----------- ----------- -------- -------- -------- -------- -------- --------
23,806,283 17,748,442 $33.30 $30.55 $10.28 $13.03 6.4 5.6
=========== =========== ======== ======== ======== ======== ======== ========
The fair value of each stock option grant was estimated as of the date
of grant using the Black-Scholes closed form option-pricing model for
stock options granted prior to September 30, 2004. A form of a lattice
option-pricing model was used for stock options granted after September
30, 2004.
The grant date fair values and assumptions used to determine such value
are as follows:
Three Months Ended
---------------------------------
March 31, March 31,
2006 2005
---------------- ----------------
Weighted-average grant date fair value $ 7.87 $ 7.29
Assumptions:
Risk-free interest rates 4.22 - 5.18 % 3.70 - 4.20 %
Expected volatility 18.50 % 13.12 - 15.96 %
Expected term (in years) 6.5 6.0
Expected dividend yield 2.20 % 1.92 %
14
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
March 31, 2006 & 2005 (Unaudited)
The total intrinsic value of nonqualified and incentive stock options
exercised during the three months ended March 31, 2006 and 2005 was
$13.4 million and $8.7 million, respectively. The total fair value of
shares vested during the three months ended March 31, 2006 and 2005
amounted to $0.4 million and $0.5 million, respectively.
There was approximately $33.6 million of total unrecognized compensation
expense related to unvested nonqualified and incentive stock options at
March 31, 2006. The total unrecognized compensation expense will be
recognized over a weighted average period of 1.5 years. For awards with
graded vesting, compensation expense was recognized using an accelerated
method prior to the adoption of SFAS 123(R) and is recognized on a
straight line basis for awards granted after the effective date.
For the three months ended March 31, 2006 and 2005 the expense for
nonqualified and incentive stock options that is included in Salaries
and employee benefits expense in the Consolidated Statements of Income
amounted to $6.6 million and $5.8 million, respectively.
Activity relating to the Corporation's Restricted Stock Purchase Rights
was:
March 31, March 31,
2006 2005
---------------- ----------------
Restricted stock purchase rights
outstanding - Beginning of Year -- --
Restricted stock purchase rights granted 7,000 7,500
Restricted stock purchase rights exercised (7,000) (7,500)
--------------- ---------------
Restricted stock purchase rights
outstanding - End of Year -- --
=============== ===============
Weighted-average grant date market value $ 43.69 $ 41.34
Aggregate compensation expense $ 1,270 $ 1,050
Unamortized compensation expense $ 11,986 $ 9,926
Restrictions on stock issued pursuant to the exercise of stock purchase
rights generally lapse within a three to seven year period.
Accordingly, the compensation related to issuance of the rights are
amortized over the vesting period. At March 31, 2006, the unamortized
compensation expense will be recognized over a weighted average period
of 1.7 years.
As participants in the Long-Term Incentive Plan will receive a cash
award at the end of the designated vesting period, this plan meets the
definition of a liability award. Unlike equity awards, liability awards
are remeasured at fair value at each balance sheet date until
settlement. For the three months ended March 31, 2006 and 2005 the
(benefit)/expense for the Long-Term Incentive Plan that is included in
Salaries and employee benefits expense in the Consolidated Statements of
Income amounted to $(1.8) million and $0.6 million, respectively.
Under SFAS 123(R), compensation expense is recognized for the ESPP. The
compensation cost per share is approximately equal to the sum of: the
initial discount (15% of beginning of plan period price per share), plus
the value of a one year call option on 85% of a share of common stock
and the value of a one year put option on 15% of a share of common stock
for each share purchased. The compensation cost per share for the ESPP
was $9.96 and $8.04 for the three months ended March 31, 2006 and 2005,
respectively. Employee contributions under the ESPP are made ratably
during the plan period. Employees may withdraw from the plan prior to
the end of the one year offering period. The total estimated shares to
be purchased are estimated at the beginning of the plan period based on
total expected contributions for the plan period and 85% of the market
price at that date. The Corporation estimates that 346,342 shares will
be purchased on July 1, 2006. For the three months ended March 31, 2006
and 2005 the total expense for the ESPP that is included in Salaries and
employee benefits expense in the Consolidated Statements of Income
amounted to $0.9 million and $0.7 million, respectively.
15
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
March 31, 2006 & 2005 (Unaudited)
12. Derivative Financial Instruments and Hedging Activities
The following is an update of the Corporation's use of derivative
financial instruments and its hedging activities as described in its
Annual Report on Form 10-K for the year ended December 31, 2005.
Generally there were no substantive changes in the types of derivative
financial instruments the Corporation employs or its hedging activities
in the three months ended March 31, 2006.
Trading Instruments and Other Free Standing Derivatives
-------------------------------------------------------
Loan commitments accounted for as derivatives are not material to the
Corporation and the Corporation does not employ any formal hedging
strategies for these commitments.
Trading and free-standing derivative contracts are not linked to
specific assets and liabilities on the balance sheet or to forecasted
transactions in an accounting hedge relationship and, therefore, do not
qualify for hedge accounting under SFAS 133. They are carried at fair
value with changes in fair value recorded as a component of other
noninterest income.
At March 31, 2006, free standing interest rate swaps consisted of $1.8
billion in notional amount of receive fixed / pay floating with an
aggregate negative fair value of $34.5 million and $1.4 billion in
notional amount of pay fixed / receive floating with an aggregate
positive fair value of $35.1 million.
At March 31, 2006, interest rate caps purchased amounted to $15.0
million in notional amount with a positive fair value of $0.1 million
and interest rate caps sold amounted to $15.0 million in notional amount
with a negative fair value of $0.1 million.
At March 31, 2006, the notional value of interest rate futures
designated as trading was $2.0 billion with an immaterial fair value.
Fair Value Hedges
-----------------
The following table presents updated information with respect to
selected fair value hedges.
Fair Value Hedges
March 31, 2006 Weighted
Notional Fair Average
Hedged Hedging Amount Value Remaining
Item Instrument ($ in mil) ($ in mil) Term (Yrs)
------------------------------------------------------------------------------------------------
Fixed Rate CDs Receive Fixed Swap $ 954.6 $ (31.0) 8.2
Medium Term Notes Receive Fixed Swap 359.5 (10.4) 7.1
Fixed Rate Bank Notes Receive Fixed Swap 1,052.3 (39.8) 6.2
Institutional CDs Receive Fixed Swap 130.0 (0.7) 1.1
Brokered Bullet CDs Receive Fixed Swap 343.5 (1.3) 0.5
The impact from fair value hedges to total net interest income for the
three months ended March 31, 2006 was a positive $1.7 million. The
impact to net interest income due to ineffectiveness was not material.
16
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
March 31, 2006 & 2005 (Unaudited)
Cash Flow Hedges
----------------
The following table updates the Corporation's cash flow hedges.
Cash Flow Hedges
March 31, 2006 Weighted
Notional Fair Average
Hedged Hedging Amount Value Remaining
Item Instrument ($ in mil) ($ in mil) Term (Yrs)
------------------------------------------------------------------------------------------------
Variable Rate Loans Receive Fixed Swap $ 1,150.0 $ (47.2) 3.6
Institutional CDs Pay Fixed Swap 1,555.0 17.7 1.6
Federal Funds Purchased Pay Fixed Swap 250.0 0.0 1.4
FHLB Advances Pay Fixed Swap 1,220.0 31.5 2.8
Floating Rate Bank Notes Pay Fixed Swap 425.0 3.8 2.0
Money Market Account Pay Fixed Swap 250.0 5.8 1.3
The impact to total net interest income from cash flow hedges, including
amortization of terminated cash flow hedges was a positive $1.9 million
for the three months ended March 31, 2006. The impact due to
ineffectiveness was not material.
For the three months ended March 31, 2005, the total effect on net
interest income resulting from derivative financial instruments was a
positive $4.3 million including the amortization of terminated
derivative financial instruments.
13. Postretirement Health Plan
The Corporation sponsors a defined benefit health plan that provides
health care benefits to eligible current and retired employees.
Eligibility for retiree benefits is dependent upon age, years of
service, and participation in the health plan during active service.
The plan is contributory and in 1997 and 2002 the plan was amended.
Employees hired or retained from mergers after September 1, 1997 will be
granted access to the Corporation's plan upon becoming an eligible
retiree; however, such retirees must pay 100% of the cost of health care
benefits. The plan continues to contain other cost-sharing features
such as deductibles and coinsurance.
Net periodic postretirement benefit costs for the three months ended
March 31, 2006 and 2005 included the following components ($000's):
Three Months Ended March 31,
-------------------------------
2006 2005
-------------- --------------
Service cost $ 570 $ 553
Interest on APBO 1,022 1,159
Expected return on assets (232) (149)
Prior service amortization (680) (681)
Actuarial loss amortization 379 264
------------- -------------
$ 1,059 $ 1,146
============= =============
Benefit payments and expenses, net of participant contributions, for the
three months ended March 31, 2006 amounted to $1.0 million.
17
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
March 31, 2006 & 2005 (Unaudited)
14. Segments
The following represents the Corporation's operating segments as of and
for the three months ended March 31, 2006 and 2005. Effective January
1, 2006, the Corporation transferred a portion of its Item Processing
business from the Banking segment to Metavante. Prior period segment
information has been adjusted for the transfer. There have not been any
other changes to the way the Corporation organizes its segments.
Beginning with the third quarter of 2005, total other income for
Metavante includes float income which represents interest income on
balances invested in an affiliate bank which arises from Electronic Bill
Payment activities. This income was formerly reported as a component of
Net Interest Income for Metavante. Segment information for all periods
has been adjusted for this reclassification. Fees - intercompany
represent intercompany revenue charged to other segments for providing
certain services. Expenses - intercompany represent fees charged by
other segments for certain services received. For each segment,
Expenses - intercompany are not the costs of that segment's reported
intercompany revenues. Intrasegment revenues, expenses and assets have
been eliminated ($ in millions):
Three Months Ended March 31, 2006
---------------------------------------------------------------------------------
Reclass-
ifications Consol-
Corporate & Elimi- idated
Banking Metavante Others Overhead nations Income
------------ ------------ ------------ ------------ ----------- -------------
Net interest income $ 327.7 $ (8.3) $ 5.8 $ (3.8) $ 3.2 $ 324.6
Other income
Fees - external 73.5 343.0 54.5 1.8 -- 472.8
Fees - internal
Fees - intercompany 16.9 24.8 4.7 25.0 (71.4) --
Float income -
intercompany -- 3.2 -- -- (3.2) --
----------- ----------- ----------- ----------- ---------- -----------
Total other income 90.4 371.0 59.2 26.8 (74.6) 472.8
Other expense
Expenses - other 158.4 296.0 39.6 12.0 (0.9) 505.1
Expenses - intercompany 43.2 12.6 12.5 2.2 (70.5) --
----------- ----------- ----------- ----------- ---------- -----------
Total other expense 201.6 308.6 52.1 14.2 (71.4) 505.1
Provision for loan
and lease losses 10.5 -- 0.5 -- -- 11.0
----------- ----------- ----------- ----------- ---------- -----------
Income before taxes 206.0 54.1 12.4 8.8 -- 281.3
Income tax expense 67.8 19.6 4.6 2.5 -- 94.5
----------- ----------- ----------- ----------- ---------- -----------
Segment income $ 138.2 $ 34.5 $ 7.8 $ 6.3 $ -- $ 186.8
=========== =========== =========== =========== ========== ===========
Identifiable assets $ 44,584.0 $ 2,797.5 $ 761.8 $ 766.6 $(1,575.3) $ 47,334.6
=========== =========== =========== =========== ========== ===========
Return on average equity 14.7% 13.0% 11.8% 15.7%
=========== =========== =========== ===========
Three Months Ended March 31, 2005
---------------------------------------------------------------------------------
Reclass-
ifications Consol-
Corporate & Elimi- idated
Banking Metavante Others Overhead nations Income
------------ ------------ ------------ ------------ ----------- -------------
Net interest income $ 303.2 $ (10.4) $ 5.5 $ (1.8) $ 2.3 $ 298.8
Other income
Fees - external 70.1 282.9 47.7 1.8 -- 402.5
Fees - internal
Fees - intercompany 15.8 21.0 4.7 21.7 (63.2) --
Float income -
intercompany -- 2.3 -- -- (2.3) --
----------- ----------- ----------- ----------- ---------- -----------
Total other income 85.9 306.2 52.4 23.5 (65.5) 402.5
Other expense
Expenses - other 146.8 241.1 31.9 22.6 0.6 443.0
Expenses - intercompany 38.8 11.0 12.5 1.5 (63.8) --
----------- ----------- ----------- ----------- ---------- -----------
Total other expense 185.6 252.1 44.4 24.1 (63.2) 443.0
Provision for loan
and lease losses 7.8 -- 0.3 -- -- 8.1
----------- ----------- ----------- ----------- ---------- -----------
Income (loss) before taxes 195.7 43.7 13.2 (2.4) -- 250.2
Income tax expense (benefit) 63.9 17.4 5.1 (1.5) -- 84.9
----------- ----------- ----------- ----------- ---------- -----------
Segment income (loss) $ 131.8 $ 26.3 $ 8.1 $ (0.9) $ -- $ 165.3
=========== =========== =========== =========== ========== ===========
Identifiable assets $ 39,324.7 $ 2,419.6 $ 669.2 $ 824.7 $(1,597.7) $ 41,640.5
=========== =========== =========== =========== ========== ===========
Return on average equity 16.1% 17.6% 13.0% 16.6%
=========== =========== =========== ===========
18
MARSHALL & ILSLEY CORPORATION
Notes to Financial Statements - Continued
March 31, 2006 & 2005 (Unaudited)
Total revenue, net interest income plus total other income, by type in
Others consisted of the following ($ in millions):
Three Months Ended
March 31,
----------------------
2006 2005
---------- ----------
Trust Services $ 46.0 $ 39.6
Residential Mortgage Banking 5.1 5.0
Capital Markets 0.6 0.7
Brokerage and Insurance 7.2 7.1
Commercial Leasing 3.0 3.4
Commercial Mortgage Banking 1.7 1.2
Others 1.4 0.9
--------- ---------
Total revenue $ 65.0 $ 57.9
========= =========
19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
MARSHALL & ILSLEY CORPORATION
CONSOLIDATED AVERAGE BALANCE SHEETS (Unaudited)
($000's)
Three Months Ended March 31,
-------------------------------
2006 2005
-------------- --------------
Assets
------
Cash and due from banks $ 980,078 $ 918,907
Investment securities:
Trading securities 34,177 23,113
Short-term investments 315,719 186,993
Other investment securities:
Taxable 4,979,354 4,822,827
Tax-exempt 1,340,598 1,278,156
------------- -------------
Total investment securities 6,669,848 6,311,089
Loans and leases:
Loans and leases, net of unearned income 34,641,255 29,883,640
Less: Allowance for loan and lease losses 368,290 360,948
------------- -------------
Net loans and leases 34,272,965 29,522,692
Premises and equipment, net 495,887 450,806
Accrued interest and other assets 4,335,066 3,837,773
------------- -------------
Total Assets $ 46,753,844 $ 41,041,267
============= =============
Liabilities and Shareholders' Equity
------------------------------------
Deposits:
Noninterest bearing $ 4,942,011 $ 4,693,268
Interest bearing 22,531,254 20,540,811
------------- -------------
Total deposits 27,473,265 25,234,079
Federal funds purchased and
security repurchase agreements 2,440,619 1,944,851
Other short-term borrowings 930,232 948,080
Long-term borrowings 9,404,002 7,205,154
Accrued expenses and other liabilities 1,672,495 1,667,452
------------- -------------
Total liabilities 41,920,613 36,999,616
Shareholders' equity 4,833,231 4,041,651
------------- -------------
Total Liabilities and Shareholders' Equity $ 46,753,844 $ 41,041,267
============= =============
20
OVERVIEW
--------
The Corporation's overall strategy is to drive earnings per share growth
by: (1) expanding banking operations into faster growing regions beyond
Wisconsin; (2) increasing the number of financial institutions to which
the Corporation provides correspondent banking services and products; (3)
expanding trust services and other wealth management product and service
offerings; and (4) growing Metavante's business through organic growth,
cross sales of technology products and acquisitions.
The Corporation continues to focus on its key metrics of growing revenues
through balance sheet growth, fee-based income growth and strong credit
quality. Management believes that the Corporation has demonstrated solid
fundamental performance in each of these key areas and as a result, the
first quarter of 2006 produced strong financial results.
Net income for the first quarter of 2006 amounted to $186.8 million
compared to $165.3 million for the same period in the prior year, an
increase of $21.5 million, or 13.0%. Diluted earnings per share were
$0.78 for the three months ended March 31, 2006, compared with $0.71 for
the three months ended March 31, 2005, an increase of 9.9%. The return on
average assets and average equity was 1.62% and 15.67%, respectively, for
the quarter ended March 31, 2006, and 1.63% and 16.59%, respectively, for
the quarter ended March 31, 2005.
Earnings growth for the three months ended March 31, 2006 compared to the
three months ended March 31, 2005 was attributable to a number of factors.
The increase in net interest income was driven by loan and bank-issued
deposit growth. Strong credit quality and recoveries above historical
levels have resulted in net charge-offs that continue to be below the
Corporation's five-year historical average. Metavante continued to
exhibit growth in both revenue and earnings which was attributable to, in
part, to the impact of its acquisition activities as well as success in
retaining and cross-selling products and services to its core customer
base. The acquisition activities included one acquisition completed in
the first quarter of 2006, two acquisitions completed in the fourth
quarter of 2005, three acquisition completed in the third quarter of 2005
and one acquisition completed in the first quarter of 2005. Net
investment securities gains were not significant in the first quarter of
2006. During the first quarter of 2005 the Corporation realized a gain
due to the change in control of PULSE EFT Associates. These factors along
with continued expense management resulted in the reported earnings growth
in the first quarter of 2006 compared to the first quarter of 2005.
Management continues to believe that the 2006 outlook provided in the
Corporation's Annual Report on Form 10-K for the year ended December 31,
2005 is generally still representative of its expectations for the year
ended December 31, 2006. Management expects Metavante revenue will be at
the high end of the previously forecasted revenue projection of $1.4
billion to $1.5 billion including all acquisitions and the transfer of
external item processing which is discussed in the next section. As
discussed in Note 5 in Notes to Financial Statements, the previously
announced banking acquisitions closed on April 1, 2006. Management
continues to estimate that these acquisitions combined will be modestly
dilutive in 2006. The Corporation's actual results for the year ended
December 31, 2006 could differ materially from those expected by
management. See "Forward-Looking Statements" in this Form 10-Q and "Risk
Factors" in Item 1A of the Corporation's Annual Report on Form 10-K for
the year ended December 31, 2005, for a discussion of the various risk
factors that could cause actual results to be different than expected
results.
NOTEWORTHY TRANSACTIONS AND EVENTS
----------------------------------
Some of the more noteworthy transactions and events that occurred in the
three months ended March 31, 2006 and 2005 consisted of the following:
21
First quarter 2006
------------------
On January 1, 2006 the Corporation adopted the accounting standard that
requires share-based compensation to be expensed. The Corporation elected
the Modified Retrospective Application to implement this new accounting
standard. Under that method all prior period consolidated and segment
financial information was adjusted to reflect the effect of expensing
share-based compensation plans which were not previously expensed. Prior
to the adoption of the new standard, the Corporation used the intrinsic
method of accounting for stock options. Under that method generally, no
compensation expense was recognized for stock option awards or the
Corporation's employee stock purchase plan ("ESPP"). Shareholders' equity
as of January 1, 2006 increased $67.7 million due to the deferred income
tax benefit recognized from applying the Modified Retrospective
Application method of adoption. For the three months ended March 31,
2006, salaries and employee benefits expense includes $7.5 million of
expense for stock options and the ESPP, which reduced net income by $4.9
million or $0.02 per diluted share. Assuming the same number of awards
granted in 2005 and the same fair values, the Corporation expects that the
additional compensation expense associated with stock options and the ESPP
will be dilutive to the Corporation's operating results for the year ended
December 31, 2006 by approximately $0.10 per diluted share compared to
$0.11 per diluted share for the year ended December 31, 2005 as adjusted.
The Corporation's largest stock option awards have historically been
granted during the fourth quarter and expense for stock options is larger
in the fourth quarter compared to the other quarters in any given year.
Under the existing plans, awards to individuals who meet certain age and
years of service criteria at the date of grant immediately vest and
therefore the full fair value of those awards are immediately expensed.
See Note 11 in Notes to Financial Statements for further information.
Beginning with the first quarter of 2006, the Corporation included certain
loan and lease fees, primarily prepayment fees, in reported interest
income on loans and leases. Previously, these fees were reported in Other
income. Such fees are in addition to loan origination fees that are
capitalized and amortized over the life of a loan or lease on a basis that
produces a level yield in accordance with existing accounting standards.
Including these fees in interest income may result in more volatility in
net interest income and the net interest margin. However, management
believes this reclassification will improve comparability of the net
interest margin between the Corporation and its peer banking group. All
prior periods have been restated for this reclassification.
On January 1, 2006 the Banking segment transferred its external item
processing business, including all check-processing client relationships,
to Metavante. This transfer, together with recent investments in
electronic check image technology, enables Metavante to provide its
clients with an end-to-end image solution that includes check truncation
at the point of first presentment, image exchange through the Endpoint
Exchange Network and final settlement. As a result of the transfer, the
previously reported Other income line, Item processing, was reclassified
to Data processing services in the Consolidated Statements of Income and
prior period segment financial information for both the Banking segment
and Metavante has been adjusted for the transfer. The transfer did not
materially affect the period to period comparability of Data processing
services revenue or segment related information. See Note 14 in Notes to
Financial Statements for segment information.
First quarter 2005
------------------
As a result of adopting the accounting standard that requires share-based
compensation to be expensed, as previously discussed, adjusted Salaries
and employee benefits expense for the three months ended March 31, 2005
includes $6.5 million of expense for stock options and the ESPP which
reduced previously reported net income by $4.3 million or $0.02 per
diluted share. Shareholders' equity at March 31, 2005 increased $63.2
million as a result of the adjustments. See Note 11 in Notes to Financial
Statements for further information.
During the first quarter of 2005, the Corporation's Banking segment's
investment in certain membership interests of PULSE EFT Associates
("PULSE") was liquidated by PULSE due to a change in control. The cash
received resulted in a pre-tax gain of $5.6 million which is reported in
Net investment securities gains (losses) in the Consolidated Statements of
Income.
NET INTEREST INCOME
-------------------
Net interest income is the difference between interest earned on earning
assets and interest owed on interest bearing liabilities. Net interest
income represented approximately 40.7% of the Corporation's source of
revenues for the three months ended March 31, 2006 compared to 42.6% for
the three months ended March 31, 2005.
Net interest income for the first quarter of 2006 amounted to $324.6
million compared to $298.9 million reported for the first quarter of 2005,
an increase of $25.7 million or 8.6%. Loan growth and the growth in
noninterest bearing and other bank-issued deposits were the primary
contributors to the increase in net interest income. Factors negatively
affecting net interest income compared to the prior year quarter included
the impact of the financing costs associated with Metavante's 2005
acquisitions, common stock buybacks and the re-financing of longer-term
funding sources that matured during the first quarter of 2006.
Average earning assets in the first quarter of 2006 amounted to $41.3
billion compared to $36.2 billion in the first quarter of 2005, an
increase of $5.1 billion or 14.1%. Average loans and leases accounted for
$4.8 billion of the growth in average earning assets in the first quarter
of 2006 compared to the first quarter of 2005. Average investment
securities increased $0.2 billion over the prior year quarter.
Average interest bearing liabilities increased $4.7 billion or 15.2% in
the first quarter of 2006 compared to the first quarter of 2005. Average
interest bearing deposits increased $2.0 billion or 9.7% in the first
quarter of 2006 compared to the first quarter of last year. Average total
borrowings, primarily long-term borrowings, increased $2.7 billion or
26.5% in the first quarter of 2006 compared to the same period in 2005.
22
Average noninterest bearing deposits increased $0.2 billion or 5.3% in the
three months ended March 31, 2006 compared to the same period last year.
The growth and composition of the Corporation's quarterly average loan and
lease portfolio for the current quarter and previous four quarters are
reflected in the following table ($ in millions):
Consolidated Average Loans and Leases
-------------------------------------
2006 2005 Growth Pct.
--------- ---------------------------------------- ------------------
First Fourth Third Second First Prior
Quarter Quarter Quarter Quarter Quarter Annual Quarter
--------- --------- --------- --------- --------- -------- ---------
Commercial Loans and Leases
---------------------------
Commercial $ 9,839 $ 9,290 $ 9,126 $ 8,932 $ 8,460 16.3 % 5.9 %
Commercial real estate
Commercial mortgages 8,839 8,850 8,661 8,509 8,275 6.8 (0.1)
Construction 1,742 1,564 1,484 1,358 1,241 40.3 11.4
-------- -------- -------- -------- -------- ------ ------
Total commercial real estate 10,581 10,414 10,145 9,867 9,516 11.2 1.6
Commercial lease financing 493 471 462 425 398 23.9 4.7
-------- -------- -------- -------- -------- ------ ------
Total Commercial Loans
and Leases 20,913 20,175 19,733 19,224 18,374 13.8 3.7
Personal Loans and Leases
-------------------------
Residential real estate
Residential mortgages 5,190 4,855 4,537 3,986 3,562 45.7 6.9
Construction 2,085 1,862 1,633 1,382 1,167 78.7 12.0
-------- -------- -------- -------- -------- ------ ------
Total residential real estate 7,275 6,717 6,170 5,368 4,729 53.8 8.3
Personal loans
Student 99 78 74 78 88 12.7 26.2
Credit card 227 233 228 217 217 4.6 (2.6)
Home equity loans and lines 4,706 4,822 4,905 5,098 5,131 (8.3) (2.4)
Other 1,289 1,245 1,241 1,186 1,217 5.9 3.5
-------- -------- -------- -------- -------- ------ ------
Total personal loans 6,321 6,378 6,448 6,579 6,653 (5.0) (0.9)
Personal lease financing 132 132 128 123 128 3.2 0.1
-------- -------- -------- -------- -------- ------ ------
Total Personal Loans
and Leases 13,728 13,227 12,746 12,070 11,510 19.3 3.8
-------- -------- -------- -------- -------- ------ ------
Total Consolidated Average
Loans and Leases $ 34,641 $ 33,402 $ 32,479 $ 31,294 $ 29,884 15.9 % 3.7 %
======== ======== ======== ======== ======== ====== ======
Total consolidated average loans and leases increased $4.8 billion or
15.9% in the first quarter of 2006 compared to the first quarter of 2005.
Total average commercial loan and lease growth was $2.6 billion, a 13.8%
increase in the current quarter compared to the first quarter of 2005.
Approximately 54.3% of the growth in total average commercial loans and
leases was attributable to commercial and industrial loans. Total average
personal loans and leases increased $2.2 billion or 19.3% in the first
quarter of 2006 compared to the first quarter of 2005. This growth was
driven primarily by growth in residential real estate loans, which
increased $2.5 billion or 53.8%. Average home equity loans and lines
decreased $425 million or 8.3% in the first quarter of 2006 compared to
the first quarter of 2005. From a production standpoint, residential real
estate loan closings in the first quarter of 2006 were $1.2 billion or
2.9% greater than loan closings in the first quarter of 2005 and were $0.2
billion or 14.3% lower than loan closings in the fourth quarter of 2005.
Total average commercial loan and lease growth continued to be strong in
the first quarter of 2006. Management attributes the loan growth to the
strength of the local economies in the markets the Corporation serves, new
business and continued customer satisfaction. Management continues to
expect that organic commercial loan growth (as a percentage) will reach
low double digits in 2006. The basis for this expectation includes
continued success in attracting new customers in all of the Corporation's
markets and continued modest economic growth in the primary markets that
the Corporation serves.
Home equity loans and lines, which includes M&I's wholesale activity,
continue to be one of the primary consumer loan products. Average home
equity loans and lines declined in the first quarter of 2006 compared to
the first quarter of 2005. This is consistent with what is occurring in
many parts of the country. The softer home equity market, combined with
the Corporation's continued sales of loans sold at origination in response
to the increased demand for home equity products with higher loan-to-value
characteristics, will impact balance sheet organic loan growth.
Management does not expect this trend to change in the near term.
23
The Corporation sells some of its residential real estate production
(residential real estate and home equity loans) in the secondary market.
Selected residential real estate loans with rate and term characteristics
that are considered desirable are periodically retained in the portfolio.
For the three months ended March 31, 2006 and 2005 real estate loans sold
to investors amounted to $0.6 billion and $0.4 billion, respectively. At
March 31, 2006 and 2005, the Corporation had approximately $120.7 million
and $103.9 million of mortgage loans held for sale, respectively. Gains
from the sale of mortgage loans amounted to $10.7 million in the first
quarter of 2006 compared to $6.9 million in the first quarter of 2005.
Auto loans securitized and sold in the first quarters of 2006 and 2005
amounted to $0.2 billion and $0.1 billion, respectively. Net gains from
the sale and securitization of auto loans were $0.1 million for the first
quarter of 2006 compared to net losses of $0.4 million in the first
quarter of 2005. The losses in the first quarter of 2005, were primarily
due to lower loan interest spreads associated with new auto loan
production in a rising interest rate environment. Auto loans held for
sale amounted to $38.4 million at March 31, 2006.
The Corporation anticipates that it will continue to divest itself of
selected assets through sale or securitization in future periods.
The growth and composition of the Corporation's quarterly average deposits
for the current and previous four quarters are as follows ($ in millions):
Consolidated Average Deposits
-----------------------------
2006 2005 Growth Pct.
--------- ---------------------------------------- ------------------
First Fourth Third Second First Prior
Quarter Quarter Quarter Quarter Quarter Annual Quarter
--------- --------- --------- --------- --------- -------- ---------
Bank issued deposits
--------------------
Noninterest bearing deposits
Commercial $ 3,473 $ 3,687 $ 3,589 $ 3,377 $ 3,263 6.4 % (5.8)%
Personal 943 942 932 958 930 1.4 (0.0)
Other 526 566 528 491 500 5.2 (7.1)
-------- -------- -------- -------- -------- ------ ------
Total noninterest
bearing deposits 4,942 5,195 5,049 4,826 4,693 5.3 (4.9)
Interest bearing deposits
Savings and NOW 2,831 2,911 3,049 3,149 3,281 (13.7) (2.7)
Money market 6,599 6,354 6,047 5,819 5,692 15.9 3.9
Foreign activity 1,034 1,084 932 882 904 14.3 (4.6)
-------- -------- -------- -------- -------- ------ ------
Total interest
bearing deposits 10,464 10,349 10,028 9,850 9,877 5.9 1.1
Time deposits
Other CDs and time deposits 3,509 3,354 3,095 2,951 2,787 25.9 4.7
CDs greater than $100,000 2,035 1,703 1,421 1,243 1,074 89.5 19.5
-------- -------- -------- -------- -------- ------ ------
Total time deposits 5,544 5,057 4,516 4,194 3,861 43.6 9.6
-------- -------- -------- -------- -------- ------ ------
Total bank issued deposits 20,950 20,601 19,593 18,870 18,431 13.7 1.7
Wholesale deposits
------------------
Money market 887 1,074 1,068 1,077 1,073 (17.4) (17.3)
Brokered CDs 3,874 4,752 4,615 4,437 4,761 (18.6) (18.5)
Foreign time 1,762 897 1,076 1,086 969 81.8 96.4
-------- -------- -------- -------- -------- ------ ------
Total wholesale deposits 6,523 6,723 6,759 6,600 6,803 (4.1) (3.0)
-------- -------- -------- -------- -------- ------ ------
Total consolidated
average deposits $ 27,473 $ 27,324 $ 26,352 $ 25,470 $ 25,234 8.9 % 0.5 %
======== ======== ======== ======== ======== ====== ======
Average total bank issued deposits increased $2.5 billion or 13.7% in the
first quarter of 2006 compared to the first quarter of 2005. Average
noninterest bearing deposits increased $0.2 billion, average bank-issued
interest bearing deposits increased $0.6 billion and average bank issued
time deposits increased $1.7 billion in the current quarter compared to
the first quarter of the prior year.
Noninterest bearing deposit balances tend to exhibit some seasonality with
a trend of balances declining somewhat in the early part of the year
followed by growth in balances throughout the remainder of the year. A
portion of the noninterest balances, especially commercial balances, is
sensitive to the interest rate environment. Larger balances tend to be
maintained when overall interest rates are low and smaller balances tend
to be maintained as overall interest rates increase.
24
As interest rates have risen, the Corporation has increasingly been able
to competitively price deposit products which has contributed to the
growth in average bank-issued interest bearing deposits and average bank
issued time deposits.
In commercial banking, the focus remains on developing deeper
relationships by capitalizing on cross-sale opportunities. Incentive
plans based on the sale of treasury management products and services are
focused on growing deposits. The retail banking strategy continues to
focus on aggressively selling the right products to meet the needs of
customers and enhance the Corporation's profitability.
For the three months ended March 31, 2006, average wholesale deposits
decreased $0.3 billion, or 4.1% compared to the three months ended March
31, 2005. During the first quarter of 2006, a significant portion of
longer-term institutional certificates of deposits matured and were re-
financed at a higher cost. These deposits are funds in the form of
deposits generated through distribution channels other than M&I's own
banking branches. The Corporation continues to make use of wholesale
funding alternatives, especially brokered and institutional certificates
of deposit. These deposits allow the Corporation's bank subsidiaries to
gather funds across a wider geographic base and at pricing levels
considered attractive, where the underlying depositor may be retail or
institutional.
During the first quarter of 2006, the Corporation issued $250.0 million of
fixed rate senior notes. The fixed rate senior notes mature in 2011 and
have a coupon rate of 5.35%. Also during the first quarter of 2006,
$500.0 million of floating rate senior bank notes were issued. These
floating rate senior bank notes mature in 2008 and have a coupon rate that
is indexed to the three-month London Inter-Bank Offered Rate. During the
first quarter of 2006, $250.0 million of senior bank notes - Extendible
Liquidity Securities matured.
During the first quarter of 2005 the Corporation obtained a new floating
rate advance from the Federal Home Loan Bank ("FHLB") aggregating $250.0
million. The FHLB advance matures in 2011 and was converted to a fixed
rate through the use of an interest rate swap. During the first quarter
of 2005, $900.0 million of senior bank notes with an annual weighted
average coupon interest rate of 4.13% were issued. The notes mature at
various times beginning in 2008 through 2017.
25
The Corporation's consolidated average interest earning assets and
interest bearing liabilities, interest earned and interest paid for the
three months ended March 31, 2006 and 2005, are presented in the following
tables ($ in millions):
Consolidated Yield and Cost Analysis
------------------------------------
Three Months Ended Three Months Ended
March 31, 2006 March 31, 2005
--------------------------- ---------------------------
Average Average
Average Yield or Average Yield or
Balance Interest Cost (b) Balance Interest Cost (b)
--------------------------- ---------------------------
Loans and leases: (a)
Commercial loans and leases $ 10,332.6 $ 175.3 6.88 % $ 8,857.6 $ 120.8 5.53 %
Commercial real estate loans 10,580.4 181.1 6.94 9,516.4 138.6 5.91
Residential real estate loans 7,275.3 122.8 6.85 4,729.0 67.2 5.77
Home equity loans and lines 4,705.9 81.0 6.98 5,130.8 75.1 5.94
Personal loans and leases 1,747.0 29.2 6.77 1,649.8 22.8 5.60
---------- ------- ------- ---------- ------- -------
Total loans and leases 34,641.2 589.4 6.90 29,883.6 424.5 5.76
Investment securities (b):
Taxable 4,979.4 57.9 4.64 4,822.8 51.9 4.37
Tax Exempt (a) 1,340.6 23.4 7.20 1,278.2 23.0 7.48
---------- ------- ------- ---------- ------- -------
Total investment securities 6,320.0 81.3 5.17 6,101.0 74.9 5.01
Trading securities (a) 34.2 0.1 0.87 23.1 0.1 1.23
Other short-term investments 315.7 3.5 4.58 187.0 1.3 2.91
---------- ------- ------- ---------- ------- -------
Total interest earning assets $ 41,311.1 $ 674.3 6.61 % $ 36,194.7 $ 500.8 5.62 %
========== ======= ======= ========== ======= =======
Interest bearing deposits:
Bank issued deposits:
Bank issued interest
bearing activity deposits $ 10,464.3 $ 74.7 2.89 % $ 9,877.1 $ 33.6 1.38 %
Bank issued time deposits 5,544.3 53.3 3.90 3,861.0 26.1 2.74
---------- ------- ------- ---------- ------- -------
Total bank issued deposits 16,008.6 128.0 3.24 13,738.1 59.7 1.76
Wholesale deposits 6,522.6 70.1 4.36 6,802.7 43.8 2.61
---------- ------- ------- ---------- ------- -------
Total interest bearing deposits 22,531.2 198.1 3.57 20,540.8 103.5 2.04
Short-term borrowings 3,370.9 39.3 4.73 2,892.9 21.9 3.08
Long-term borrowings 9,404.0 104.4 4.50 7,205.2 68.4 3.85
---------- ------- ------- ---------- ------- -------
Total interest bearing liabilities $ 35,306.1 $ 341.8 3.93 % $ 30,638.9 $ 193.8 2.57 %
========== ======= ======= ========== ======= =======
Net interest margin (FTE) $ 332.5 3.26 % $ 307.0 3.44 %
======= ======= ======= =======
Net interest spread (FTE) 2.68 % 3.05 %
======= =======
(a) Fully taxable equivalent ("FTE") basis, assuming a Federal income
tax rate of 35%, and excluding disallowed interest expense.
(b) Based on average balances excluding fair value adjustments for
available for sale securities.
The net interest margin FTE decreased 18 basis points from 3.44% in the
first quarter of 2005 to 3.26% in the first quarter of 2006. Compared to
the fourth quarter of 2005 the net interest margin FTE decreased 12 basis
points from 3.38% in the fourth quarter of 2005 to 3.26% in the first
quarter of 2006. During the fourth quarter of 2005, interest recoveries,
which vary from period to period, contributed approximately 3 basis points
to the net interest margin FTE. Approximately 6 basis points of the
decline from the fourth quarter of 2005 was due to scheduled re-financings
previously discussed. Also as previously discussed, the normal
seasonality of the Corporation's noninterest bearing bank issued deposits
had a negative impact of approximately 2 basis points in the first quarter
of 2006 compared to the fourth quarter of 2005. Beginning with the first
quarter of 2006, the Corporation included certain loan and lease fees in
interest income on loans and leases. All prior periods have been restated
for this reclassification. The Corporation estimates that the net
interest margin FTE increased by approximately 9 basis points in the first
quarter of 2006, 9 basis points in the fourth quarter of 2005 and 8 basis
points in the first quarter of 2005 due to this reclassification.
26
Compared to the fourth quarter of 2005, management expects a more modest
downward pressure on the net interest margin FTE for the remainder of
2006. Management anticipates that loan spreads will most likely continue
to narrow, particularly in a rising interest rate environment, and as the
economy improves, the Corporation's capacity to generate loans may exceed
its ability to generate appropriately priced deposits. Net interest
income and the net interest margin percentage can vary and continue to be
influenced by loan and deposit growth, product spreads, pricing
competition in the Corporation's markets, prepayment activity, future
interest rate changes and various other factors.
PROVISION FOR LOAN AND LEASE LOSSES AND CREDIT QUALITY
------------------------------------------------------
The following tables present comparative consolidated credit quality
information as of March 31, 2006, and the prior four quarters:
Nonperforming Assets
--------------------
($000's)
2006 2005
----------- --------------------------------------------------
First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter
----------- ----------- ----------- ----------- -----------
Nonaccrual $ 144,484 $ 134,718 $ 141,408 $ 126,920 $ 124,416
Renegotiated 138 143 148 176 220
Past due 90 days or more 4,523 5,725 5,743 4,514 5,314
---------- ---------- ---------- ---------- ----------
Total nonperforming loans and leases 149,145 140,586 147,299 131,610 129,950
Other real estate owned 8,207 8,869 8,774 9,124 6,770
---------- ---------- ---------- ---------- ----------
Total nonperforming assets $ 157,352 $ 149,455 $ 156,073 $ 140,734 $ 136,720
========== ========== ========== ========== ==========
Allowance for loan and lease losses $ 368,760 $ 363,769 $ 362,257 $ 360,138 $ 358,280
========== ========== ========== ========== ==========
Consolidated Statistics
-----------------------
2006 2005
----------- --------------------------------------------------
First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter
----------- ----------- ----------- ----------- -----------
Net charge-offs to average
loans and leases annualized 0.07% 0.14% 0.10% 0.15% 0.11%
Total nonperforming loans and leases
to total loans and leases 0.42 0.41 0.44 0.41 0.42
Total nonperforming assets to total loans
and leases and other real estate owned 0.45 0.44 0.47 0.44 0.45
Allowance for loan and lease losses
to total loans and leases 1.05 1.06 1.09 1.12 1.17
Allowance for loan and lease losses
to total nonperforming loans and leases 247 259 246 274 276
27
Nonaccrual Loans and Leases By Type
-----------------------------------
($000's)
2006 2005
----------- --------------------------------------------------
First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter
----------- ----------- ----------- ----------- -----------
Commercial
Commercial, financial and
agricultural $ 50,103 $ 43,730 $ 47,644 $ 35,777 $ 37,587
Lease financing receivables 1,399 1,539 3,012 3,990 4,882
---------- ---------- ---------- ---------- ----------
Total commercial 51,502 45,269 50,656 39,767 42,469
Real estate
Construction and land development 3,276 913 3,057 1,500 785
Commercial mortgage 30,633 28,644 30,351 37,107 28,115
Residential mortgage 57,425 57,982 56,488 47,797 52,056
---------- ---------- ---------- ---------- ----------
Total real estate 91,334 87,539 89,896 86,404 80,956
Personal 1,648 1,910 856 749 991
---------- ---------- ---------- ---------- ----------
Total nonaccrual loans and leases $ 144,484 $ 134,718 $ 141,408 $ 126,920 $ 124,416
========== ========== ========== ========== ==========
Reconciliation of Allowance for Loan and Lease Losses
-----------------------------------------------------
($000's)
2006 2005
----------- --------------------------------------------------
First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter
----------- ----------- ----------- ----------- -----------
Beginning balance $ 363,769 $ 362,257 $ 360,138 $ 358,280 $ 358,110
Provision for loan and lease losses 10,995 12,995 9,949 13,725 8,126
Loans and leases charged-off
Commercial 3,869 9,481 2,256 3,767 6,036
Real estate 2,901 3,110 6,576 8,190 3,339
Personal 3,727 5,213 3,186 3,765 3,416
Leases 189 226 337 380 246
---------- ---------- ---------- ---------- ----------
Total charge-offs 10,686 18,030 12,355 16,102 13,037
Recoveries on loans and leases
Commercial 2,715 4,256 2,634 2,264 2,604
Real estate 263 374 575 413 1,380
Personal 971 781 787 782 719
Leases 733 1,136 529 776 378
---------- ---------- ---------- ---------- ----------
Total recoveries 4,682 6,547 4,525 4,235 5,081
---------- ---------- ---------- ---------- ----------
Net loans and leases charge-offs 6,004 11,483 7,830 11,867 7,956
---------- ---------- ---------- ---------- ----------
Ending balance $ 368,760 $ 363,769 $ 362,257 $ 360,138 $ 358,280
========== ========== ========== ========== ==========
Nonperforming assets consist of nonperforming loans and leases and other
real estate owned ("OREO").
OREO is principally comprised of commercial and residential properties
acquired in partial or total satisfaction of problem loans and amounted to
$8.2 million at March 31, 2006, compared to $8.9 million at December 31,
2005 and $6.8 million at March 31, 2005.
Nonperforming loans and leases consist of nonaccrual, renegotiated or
restructured loans, and loans and leases that are delinquent 90 days or
more and still accruing interest. The balance of nonperforming loans and
leases can fluctuate widely based on the timing of cash collections,
renegotiations and renewals.
Maintaining nonperforming assets at an acceptable level is important to
the ongoing success of a financial services institution. The
Corporation's comprehensive credit review and approval process are
critical to ensuring that the amount of nonperforming assets on a long-
term basis is minimized within the overall framework of acceptable levels
of credit risk. In addition to the negative impact on net interest income
and credit losses, nonperforming assets also increase operating costs due
to the expense associated with collection efforts.
28
At March 31, 2006, nonperforming loans and leases amounted to $149.1
million or 0.42% of consolidated loans and leases compared to $140.6
million or 0.41% of consolidated loans and leases at December 31, 2005,
and $130.0 million or 0.42% of consolidated loans and leases at March 31,
2005. At March 31, 2006 nonperforming loans and leases increased $8.5
million or 6.1% compared to nonperforming loans and leases at December 31,
2005. Despite the increase, the ratio of nonperforming loans and leases
to consolidated loans and leases at March 31, 2006 and at each quarter end
throughout 2005 has remained in a fairly narrow range and continues to be
below management's expectations. Nonaccrual loans and leases continue to
be the primary source of nonperforming loans and leases. Since December
31, 2005, nonaccrual commercial and industrial loans and nonaccrual
commercial real estate loans have been the largest contributors to the
increase in nonaccrual loans and leases.
Net charge-offs amounted to $6.0 million or 0.07% of average loans and
leases in the first quarter of 2006 compared to $11.5 million or 0.14% of
average loans and leases in the fourth quarter of 2005 and $8.0 million or
0.11% of average loans and leases in the first quarter of 2005. The lower
level of net charge-offs experienced throughout 2005 and the first three
months of 2006 has to some extent been the result of higher than normal
recoveries. Based on the status of some of the larger charge-offs
recognized in recent quarters, management expects recoveries will likely
return to lower levels in future periods. Recoveries in the first quarter
of 2006 were $4.7 million compared to $6.5 million in the fourth quarter
of 2005 and $5.1 million in the first quarter of 2005. The ratio of
recoveries to charge-offs was 43.8% in the first quarter of 2006 which was
above the Corporation's five year historical average ratio of recoveries
to charge-offs of 27.9%.
Management continues to expect the longer term level of nonperforming
loans and leases to be in the range of 50-60 basis points of total loans
and leases and expects net charge-offs to trend to historical levels.
Management does not believe that current net charge-off levels are
sustainable indefinitely.
The provisions for loan and lease losses amounted to $11.0 million for the
three months ended March 31, 2006 compared to $13.0 million for the three
months ended December 31, 2005 and $8.1 million for the three months ended
March 31, 2005. The allowance for loan and lease losses as a percent of
consolidated loans and leases outstanding was 1.05% at March 31, 2006,
1.06% at December 31, 2005 and 1.17% at March 31, 2005.
OTHER INCOME
------------
Other income or noninterest sources of revenue represented approximately
59.3% and 57.4% of the Corporation's total sources of revenues for the
three months ended March 31, 2006 and 2005, respectively. Total other
income in the first quarter of 2006 amounted to $472.8 million compared to
$402.5 million in the same period last year, an increase of $70.3 million
or 17.5%. The increase in other income was primarily due to growth in
data processing services, trust services revenue and mortgage banking
revenue.
Data processing services revenue amounted to $343.0 million in the first
quarter of 2006 compared to $282.9 million in the first quarter of 2005,
an increase of $60.1 million or 21.2%. Revenue growth continued
throughout the segment due to revenue associated with acquisitions, higher
transaction volumes in core processing activity, payment processing and
electronic banking and an increase in healthcare eligibility and payment
card production. Revenue associated with Metavante's acquisitions
completed in 2006 and 2005 contributed a significant portion of the
revenue growth in the three months ended March 31, 2006, compared to the
three months ended March 31, 2005. The acquisition related revenue growth
includes cross sales of acquired products to clients across the entire
segment. Due to the focus of some of the acquired companies on software
sales and the retail marketplace, Data processing services revenue will
tend to be somewhat more cyclical and seasonal in nature. Total buyout
revenue, which varies from period to period, decreased $1.1 million in the
current quarter compared to the first quarter of last year.
On January 1, 2006 the Banking segment transferred its external item
processing business, including all check-processing client relationships,
to Metavante. This transfer, together with recent investments in
electronic check image technology, enables Metavante to provide its
clients with an end-to-end image solution that includes check truncation
at the point of first presentment, image exchange through the Endpoint
Exchange Network and final settlement. As a result of the transfer, the
previously reported Other income line, Item processing, was reclassified
to Data processing services in the Consolidated Statements of Income and
prior period segment financial information for both the Banking segment
and Metavante has been adjusted for the transfer. The transfer did not
materially affect the period to period comparability of Data processing
services revenue or segment related information.
29
Management expects that Metavante revenue (internal and external) for the
year ended December 31, 2006 will be at the high end of the previously
forecasted revenue projection of $1.4 billion to $1.5 billion. Organic
revenue growth rates are expected to exceed prior year levels and segment
income will continue to improve. These expectations include the impact of
all acquisitions and the transfer of external item processing.
Trust services revenue amounted to $45.9 million in the first quarter of
2006 compared to $40.3 million in the first quarter of 2005, an increase
of $5.6 million or 13.9%. A portion of the revenue growth was
attributable to the 2006 acquisition of certain assets of First Trust
Indiana. The remainder of the increase in revenue was due to sales
efforts that continue to emphasize cross-selling and integrated delivery.
Assets under management were approximately $19.8 billion at March 31,
2006, compared to $18.9 billion at December 31, 2005, and $18.1 billion at
March 31, 2005.
Service charges on deposits amounted to $22.8 million in the first quarter
of 2006 compared to $23.6 million in the first quarter of 2005, a decrease
of $0.8 million. A portion of this source of fee income is sensitive to
changes in interest rates. In a rising interest rate environment,
customers that pay for services by maintaining eligible deposit balances
receive a higher earnings credit which results in lower fee income.
Service charges on deposits associated with commercial demand deposits
accounted for the majority of the decline in this revenue in the three
months ended March 31, 2006 compared to the three months ended March 31,
2005.
Total mortgage banking revenue was $12.5 million in the first quarter of
2006 compared with $8.2 million in the first quarter of 2005, an increase
of $4.3 million. For the three months ended March 31, 2006 and 2005, the
Corporation sold $0.6 billion and $0.4 billion of residential mortgage and
home equity loans to the secondary market, respectively. As previously
discussed, the Corporation continues to sell home equity loans at
origination partly in response to the increased demand for home equity
products with higher loan-to-value characteristics. Retained interests in
the form of mortgage servicing rights on residential mortgage loans sold
amounted to $0.3 million for the three months ended March 31, 2006 and
$0.2 million for the three months ended March 31, 2005.
Net investment securities gains amounted to $1.1 million and $5.8 million
for the three months ended March 31, 2006 and March 31, 2005,
respectively. As previously discussed, during the first quarter of 2005,
the Corporation's banking segment's investment in certain membership
interests of PULSE was liquidated by PULSE. The cash received resulted in
a pre-tax gain of $5.6 million.
Other income in the first quarter of 2006 amounted to $40.6 million
compared to $35.4 million in the first quarter of 2005, an increase of
$5.2 million or 14.8%. The increase in other income in the first quarter
of 2006 compared to the first quarter of 2005 was primarily due to
increases in card related fees, auto securitization related income and
trading and investment fees. Other income for the three months ended
March 31, 2006 includes a gain of $1.2 million from a branch divestiture.
Other income for the three months ended March 31, 2005 includes a gain of
$0.8 million from a required sale of a facility.
OTHER EXPENSE
-------------
Total other expense for the three months ended March 31, 2006 amounted to
$505.1 million compared to $443.0 million for the three months ended March
31, 2005, an increase of $62.1 million or 14.0%.
Total other expense for the three months ended March 31, 2006 included the
operating expenses associated with Metavante's 2005 and 2006 acquisitions
which had a significant impact on the period to period comparability of
operating expenses in 2006 compared to 2005. Approximately $38.3 million
of the operating expense growth in the first quarter of 2006 compared to
the first quarter of 2005 was attributable to the acquisitions. The
operating expenses of the acquired entities have been included in the
Corporation's consolidated operating expenses from the dates the
transactions were completed.
The Corporation estimates that its expense growth in the three months
ended March 31, 2006 compared to the three months ended March 31, 2005,
excluding the effects of Metavante's acquisitions, was approximately $23.8
million or 5.4%.
30
Expense control is sometimes measured in the financial services industry
by the efficiency ratio statistic. The efficiency ratio is calculated by
taking total other expense divided by the sum of total other income
(including Capital Markets revenue but excluding investment securities
gains or losses) and net interest income on a fully taxable equivalent
basis. The Corporation's efficiency ratios for the three months ended
March 31, 2006, and prior four quarters were:
Efficiency Ratios
-----------------
Three Months Ended
---------------------------------------------------------------------
March 31, December 31, September 30, June 30, March 31,
2006 2005 2005 2005 2005
------------ ------------- -------------- ------------- -------------
Consolidated Corporation 62.8 % 64.1 % 62.5 % 60.9 % 62.9 %
Consolidated Corporation
Excluding Metavante 48.8 % 51.5 % 50.8 % 49.9 % 50.6 %
Salaries and employee benefits expense amounted to $277.4 million in the
first quarter of 2006 compared to $245.1 million in the first quarter of
2005, an increase of $32.3 million or 13.2%. Salaries and benefits
associated with Metavante acquisitions previously discussed accounted for
approximately $15.3 million of the increase in salaries and employee
benefits expense in the first quarter of 2006 compared to the first
quarter of 2005. Other contributors included increased expense for
product development and increased expense associated with professional
services revenue at Metavante, increased incentive compensation associated
with loan and deposit growth, increased personnel to build out product
lines in markets outside Wisconsin and for de novo branch expansion by the
banking segment and increased expense associated with the Trust
acquisition.
For the first quarter of 2006, occupancy and equipment expense amounted to
$57.8 million compared to $53.4 million in the first quarter of 2005, an
increase of $4.4 million or 8.3%. Metavante's acquisitions accounted for
approximately $2.9 million of the increase in occupancy and equipment
expense in the three months ended March 31, 2006 compared to the three
months ended March 31, 2005.
Software expenses, processing charges, supplies and printing, professional
services and shipping and handling expenses totaled $85.9 million in the
first quarter of 2006 compared to $65.3 million in the first quarter of
2005, an increase of $20.6 million or 31.6%. Metavante's expense growth
accounted for $20.4 million of the increase in expense for these items in
the first quarter of 2006 compared to the first quarter of 2005.
Metavante's acquisitions accounted for approximately $13.9 million of its
increase in these expense items.
Amortization of intangibles amounted to $8.9 million in the first quarter
of 2006 compared to $8.1 million in the first quarter of 2005, an increase
of $0.8 million. Amortization of core deposit intangibles, which is based
on a declining balance method, decreased $0.5 million in the first quarter
of 2006 compared to the first quarter of the prior year. For the three
months ended March 31, 2006 compared to the three months ended March 31,
2005, intangibles amortization expense in connection with Metavante's
acquisitions increased $1.8 million.
Other expense amounted to $75.1 million in the first quarter of 2006
compared to $71.2 million in the first quarter of 2005, an increase of
$3.9 million or 5.6%. Metavante's acquisitions accounted for
approximately $3.7 million of the increase in other expense in the first
three months of 2006 compared to the first three months of 2005.
Other expense is affected by the capitalization of costs, net of
amortization associated with software development and customer data
processing conversions. Net software and conversion amortization was $2.7
million in the first quarter of 2006 compared to $5.8 million in the first
quarter of 2005, resulting in a decrease to other expense over the
comparative quarters of $3.1 million.
INCOME TAXES
------------
The provision for income taxes for the three months ended March 31, 2006
amounted to $94.5 million or 33.6% of pre-tax income compared to $84.9
million or 33.9% of pre-tax income for the three months ended March 31,
2005.
31
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
Shareholders' equity was $4.9 billion or 10.3% of total consolidated
assets at March 31, 2006, compared to $4.7 billion or 10.2% of total
consolidated assets at December 31, 2005, and $4.1 billion or 9.8% of
total consolidated assets at March 31, 2005. The increase in
shareholders' equity at March 31, 2006 was primarily due to earnings net
of dividends paid.
During the first quarter of 2006, the Corporation issued 527,864 shares of
its common stock valued at $23.2 million in conjunction with Metavante's
acquisition of AdminiSource Inc. Also during the first quarter of 2006,
the Corporation issued 385,192 shares of its common stock valued at $16.9
million to fund its 2005 obligations under its retirement and employee
stock ownership plans.
On April 25, 2006, the Corporation announced that its Board of Directors
increased the quarterly cash dividend on its common stock 12.5%, from
$0.24 per share to $0.27 per share.
The Corporation has a Stock Repurchase Program under which it may
repurchase up to 12 million shares of its common stock annually. During
the first quarter of 2006, the Corporation repurchased 1.0 million shares
at an aggregate cost of $41.8 million or an average price of $41.79 per
common share.
In 2005 the Corporation entered into an equity distribution agreement
whereby the Corporation may offer and sell up to 3.5 million shares of its
common stock from time to time through certain designated sales agents.
However, the Corporation will not sell more than the number of shares of
its common stock necessary for the aggregate gross proceeds from such
sales to reach $150.0 million. No sales occurred during the first quarter
of 2006.
At March 31, 2006, the net loss in accumulated other comprehensive income
amounted to $43.7 million, which represented a negative change in
accumulated other comprehensive income of $6.5 million since December 31,
2005. Net accumulated other comprehensive income associated with
available for sale investment securities was a net loss of $46.9 million
at March 31, 2006, compared to a net loss of $36.3 million at December 31,
2005, resulting in a net loss of $10.6 million over the three month
period. Net accumulated other comprehensive income associated with the
change in fair value of the Corporation's derivative financial instruments
designated as cash flow hedges was a net gain of $4.1 million over the
three month period.
The Corporation continues to have a strong capital base and its regulatory
capital ratios are significantly above the minimum requirements as shown
in the following tables. The risk-based capital and leverage ratios at
December 31, 2005 have not been adjusted for the adoption of SFAS 123(R).
RISK-BASED CAPITAL RATIOS
-------------------------
($ in millions)
March 31, 2006 December 31, 2005
--------------------------------- ---------------------------------
Amount Ratio Amount Ratio
--------------------------------- ---------------------------------
Tier 1 Capital $ 3,251 7.92 % $ 3,046 7.67 %
Tier 1 Capital
Minimum Requirement 1,641 4.00 1,588 4.00
----------------- ------------- ----------------- -------------
Excess $ 1,610 3.92 % $ 1,458 3.67 %
================= ============= ================= =============
Total Capital $ 4,837 11.79 % $ 4,659 11.74 %
Total Capital
Minimum Requirement 3,281 8.00 3,176 8.00
----------------- ------------- ----------------- -------------
Excess $ 1,556 3.79 % $ 1,483 3.74 %
================= ============= ================= =============
Risk-Adjusted Assets $ 41,020 $ 39,698
================= =================
32
LEVERAGE RATIOS
---------------
($ in millions)
March 31, 2006 December 31, 2005
--------------------------------- ---------------------------------
Amount Ratio Amount Ratio
--------------------------------- ---------------------------------
Tier 1 Capital $ 3,251 7.30 % $ 3,046 7.08 %
Minimum Leverage
Requirement 1,337 - 2,228 3.00 - 5.00 1,291 - 2,152 3.00 - 5.00
----------------- ------------- ----------------- -------------
Excess $ 1,914 - 1,023 4.30 - 2.30 % $ 1,755 - 894 4.08 - 2.08 %
================= ============= ================= =============
Adjusted Average
Total Assets $ 44,549 $ 43,039
================= =================
M&I manages its liquidity to ensure that funds are available to each of
its banks to satisfy the cash flow requirements of depositors and
borrowers and to ensure the Corporation's own cash requirements are met.
M&I maintains liquidity by obtaining funds from several sources.
The Corporation's most readily available source of liquidity is its
investment portfolio. Investment securities available for sale, which
totaled $6.0 billion at March 31, 2006, represent a highly accessible
source of liquidity. The Corporation's portfolio of held-to-maturity
investment securities, which totaled $0.6 billion at March 31, 2006,
provides liquidity from maturities and amortization payments. The
Corporation's loans held for sale provide additional liquidity. These
loans represent recently funded loans that are prepared for delivery to
investors, which generally occurs within thirty to ninety days after the
loan has been funded.
Depositors within M&I's defined markets are another source of liquidity.
Core deposits (demand, savings, money market and consumer time deposits)
averaged $17.9 billion in the first quarter of 2006. The Corporation's
banking affiliates may also access the federal funds markets or utilize
collateralized borrowings such as treasury demand notes or FHLB advances.
The banking affiliates may use wholesale deposits, which include foreign
(Eurodollar) deposits. Wholesale deposits are funds in the form of
deposits generated through distribution channels other than the
Corporation's own banking branches. These deposits allow the
Corporation's banking subsidiaries to gather funds across a national
geographic base and at pricing levels considered attractive, where the
underlying depositor may be retail or institutional. Access to wholesale
deposits also provides the Corporation with the flexibility to not pursue
single service time deposit relationships in markets that have experienced
some unprofitable pricing levels. Wholesale deposits averaged $6.5
billion in the first quarter of 2006.
The Corporation utilizes certain financing arrangements to meet its
balance sheet management, funding, liquidity, and market or credit risk
management needs. The majority of these activities are basic term or
revolving securitization vehicles. These vehicles are generally funded
through term-amortizing debt structures or with short-term commercial
paper designed to be paid off based on the underlying cash flows of the
assets securitized. These vehicles provide access to funding sources
substantially separate from the general credit risk of the Corporation and
its subsidiaries. See Note 8 to the Consolidated Financial Statements for
an update of the Corporation's securitization activities in the first
quarter of 2006.
The Corporation's lead bank, M&I Marshall & Ilsley Bank (the "Bank"), has
implemented a bank note program which permits it to issue up to $7.0
billion of short-term and medium-term notes which are offered and sold
only to institutional investors. This program is intended to enhance
liquidity by enabling the Bank to sell its debt instruments in private
markets in the future without the delays which would otherwise be
incurred. Bank notes outstanding at March 31, 2006 amounted to $6.0
billion of which $1.3 billion is subordinated and qualifies as
supplementary capital for regulatory capital purposes. Bank notes issued
during the first quarter of 2006 amounted to $500.0 million.
The national capital markets represent a further source of liquidity to
M&I. M&I has filed a number of shelf registration statements that are
intended to permit M&I to raise funds through sales of corporate debt
and/or equity securities with a relatively short lead time.
During the third quarter of 2005, the Corporation amended the shelf
registration statement originally filed with the Securities and Exchange
Commission during the second quarter of 2004 to include the equity
distribution agreement. The amended shelf registration statement enables
the Corporation to issue various securities, including debt securities,
common stock, preferred stock, depositary shares, purchase contracts,
units, warrants, and trust preferred securities, up to an aggregate amount
of $3.0 billion. Approximately $1.3 billion is available for future
securities issuances.
33
During the fourth quarter of 2004, the Corporation filed a shelf
registration statement with the Securities and Exchange Commission
enabling the Corporation to issue up to 6.0 million shares of its common
stock, which may be offered and issued from time to time in connection
with acquisitions by M&I, Metavante and/or other consolidated subsidiaries
of the Corporation. At March 31, 2006, there were 3.1 million shares of
common stock available for future issuances.
Under another shelf registration statement, the Corporation may issue up
to $0.6 billion of medium-term Series F notes with maturities ranging from
9 months to 30 years and at fixed or floating rates. At March 31, 2006,
Series F notes issued amounted to $250.0 million. The Corporation may
issue up to $0.5 billion of medium-term MiNotes with maturities ranging
from 9 months to 30 years and at fixed or floating rates. The MiNotes are
issued in smaller denominations to attract retail investors. At March 31,
2006, MiNotes issued amounted to $0.2 billion. Additionally, the
Corporation has a commercial paper program. At March 31, 2006, commercial
paper outstanding amounted to $0.3 billion.
Short-term borrowings represent contractual debt obligations with
maturities of one year or less and amounted to $3.0 billion at March 31,
2006. Long-term borrowings amounted to $9.7 billion at March 31, 2006.
The scheduled maturities of long-term borrowings including estimated
interest payments at March 31, 2006 are as follows: $2.9 billion is due in
less than one year; $3.1 billion is due in one to three years; $2.2
billion is due in three to five years; and $4.1 billion is due in more
than five years. During the first quarter of 2006, the Corporation issued
shares of its common stock valued at $16.9 million to fund a portion of
its 2005 obligations under its retirement and employee stock ownership
plans. There have been no other substantive changes to the Corporation's
contractual obligations as reported in the Corporation's Annual Report on
Form 10-K for the year ended December 31, 2005.
OFF-BALANCE SHEET ARRANGEMENTS
------------------------------
At March 31, 2006, there have been no substantive changes with respect to
the Corporation's off-balance sheet activities as disclosed in the
Corporation's Annual Report on Form 10-K for the year ended December 31,
2005. See Note 8 to the Consolidated Financial Statements for an update
of the Corporation's securitization activities in the first quarter of
2006. The Corporation continues to believe that based on the off-balance
sheet arrangements with which it is presently involved, such off-balance
sheet arrangements neither have, nor are reasonably likely to have, a
material impact to its current or future financial condition, results of
operations, liquidity or capital.
CRITICAL ACCOUNTING POLICIES
----------------------------
The Corporation has established various accounting policies which govern
the application of accounting principles generally accepted in the United
States in the preparation of the Corporation's consolidated financial
statements. The significant accounting policies of the Corporation are
described in the footnotes to the consolidated financial statements
contained in the Corporation's Annual Report on Form 10-K for the year
ended December 31, 2005, and updated as necessary in its Quarterly Reports
on Form 10-Q. Certain accounting policies involve significant judgments
and assumptions by management that may have a material impact on the
carrying value of certain assets and liabilities. Management considers
such accounting policies to be critical accounting policies. The
judgments and assumptions used by management are based on historical
experience and other factors, which are believed to be reasonable under
the circumstances. Because of the nature of judgments and assumptions
made by management, actual results could differ from these judgments and
estimates which could have a material impact on the carrying values of
assets and liabilities and the results of the operations of the
Corporation. Management continues to consider the following to be those
accounting policies that require significant judgments and assumptions:
Allowance for Loan and Lease Losses
-----------------------------------
The allowance for loan and lease losses represents management's estimate
of probable losses inherent in the Corporation's loan and lease portfolio.
Management evaluates the allowance each quarter to determine that it is
adequate to absorb these inherent losses. This evaluation is supported by
a methodology that identifies estimated losses based on assessments of
individual problem loans and historical loss patterns of homogeneous loan
pools. In addition, environmental factors, including economic conditions
and regulatory guidance, unique to each measurement date are also
considered. This reserving methodology has the following components:
34
Specific Reserve. The Corporation's internal risk rating system is used
to identify loans and leases that meet the criteria as being "impaired"
under the definition in SFAS 114. A loan is impaired when, based on
current information and events, it is probable that a creditor will be
unable to collect all amounts due according to the contractual terms of
the loan agreement. For impaired loans, impairment is measured using one
of three alternatives: (1) the present value of expected future cash flows
discounted at the loan's effective interest rate; (2) the loan's
observable market price, if available; or (3) the fair value of the
collateral for collateral dependent loans and loans for which foreclosure
is deemed to be probable. In general, these loans have been internally
identified as credits requiring management's attention due to underlying
problems in the borrower's business or collateral concerns. Subject to a
minimum size, a quarterly review of these loans is performed to identify
the specific reserve necessary to be allocated to each of these loans.
This analysis considers expected future cash flows, the value of
collateral and also other factors that may impact the borrower's ability
to make payments when due.
Collective Loan Impairment. This component of the allowance for loan and
lease losses is comprised of two elements. First, the Corporation makes a
significant number of loans and leases, which due to their underlying
similar characteristics, are assessed for loss as homogeneous pools.
Included in the homogeneous pools are loans and leases from the retail
sector and commercial loans under a certain size that have been excluded
from the specific reserve allocation previously discussed. The
Corporation segments the pools by type of loan or lease and, using
historical loss information, estimates a loss reserve for each pool.
The second element reflects management's recognition of the uncertainty
and imprecision underlying the process of estimating losses. The internal
risk rating system is used to identify those loans within certain industry
segments that based on financial, payment or collateral performance,
warrant closer ongoing monitoring by management. The specific loans
mentioned earlier are excluded from this analysis. Based on management's
judgment, reserve ranges are allocated to industry segments due to
environmental conditions unique to the measurement period. Consideration
is given to both internal and external environmental factors such as
economic conditions in certain geographic or industry segments of the
portfolio, economic trends, risk profile, and portfolio composition.
Reserve ranges are then allocated using estimates of loss exposure that
management has identified based on these economic trends or conditions.
The following factors were taken into consideration in determining the
adequacy of the allowance for loan and lease losses at March 31, 2006:
In general, the economy is improving and the Corporation's customer
base is showing signs of increased business activity as evidenced by
the continued loan growth in this quarter.
At March 31, 2006, allowances for loan and lease losses continue to be
carried for exposures to manufacturing, healthcare, production
agriculture (including dairy and cropping operations), truck
transportation, accommodation, general contracting, motor vehicle and
parts dealers and the airline industries. The majority of the
commercial charge-offs incurred during the past three years were in
these industry segments. While most loans in these categories are
still performing, the Corporation continues to believe these sectors
present a higher than normal risk due to their financial and external
characteristics. Reduced revenues causing a declining utilization of
the industry's capacity levels can affect collateral values and the
amounts realized through the sale or liquidation.
During the first quarter of 2006, the Corporation's commitments to
Shared National Credits were approximately $3.3 billion with usage
averaging around 44%. Many of the Corporation's largest charge-offs
have come from the Shared National Credit portfolio. Although these
factors result in an increased risk profile, as of March 31, 2006,
Shared National Credit nonperforming loans amounted to $3.0 million.
The Corporation's exposure to Shared National Credits is monitored
closely given this lending group's loss experience.
The Corporation's primary lending areas are Wisconsin, Arizona,
Minnesota and Missouri. Each of these regions has cultural and
environmental factors that are unique to them. At March 31, 2006, total
nonperforming loans and leases as a percent of total loans and leases
for the Missouri region was higher than the consolidated total of
nonperforming loans and leases as a percent of total consolidated loans
and leases.
At March 31, 2006, nonperforming loans and leases amounted to $149.1
million or 0.42% of consolidated loans and leases compared to $140.6
million or 0.41% of consolidated loans and leases at December 31, 2005,
and $130.0 million or 0.42% of consolidated loans and leases at March
31, 2005. At March 31, 2006 nonperforming loans and leases increased
$8.5 million or 6.1% compared to nonperforming loans and leases at
December 31, 2005. Despite the increase, the ratio of nonperforming
loans and leases to consolidated loans and leases at March 31, 2006 and
at each quarter end throughout 2005 has remained in a fairly narrow
range and continues to be below management's expectations. Nonaccrual
loans and leases continue to be the primary source of nonperforming
loans and leases. Since December 31, 2005, nonaccrual commercial and
industrial loans and nonaccrual commercial real estate loans have been
the largest contributors to the increase in nonaccrual loans and
leases.
35
Net charge-offs amounted to $6.0 million or 0.07% of average loans and
leases in the first quarter of 2006 compared to $11.5 million or 0.14%
of average loans and leases in the fourth quarter of 2005 and $8.0
million or 0.11% of average loans and leases in the first quarter of
2005. The lower level of net charge-offs experienced throughout 2005
and the first three months of 2006 has to some extent been the result
of higher than normal recoveries. Based on the status of some of the
larger charge-offs recognized in recent quarters, management expects
recoveries will likely return to lower levels in future periods.
Recoveries in the first quarter of 2006 were $4.7 million compared to
$6.5 million in the fourth quarter of 2005 and $5.1 million in the
first quarter of 2005. The ratio of recoveries to charge-offs was
43.8% in the first quarter of 2006 which was above the Corporation's
five year historical average ratio of recoveries to charge-offs of
27.9%.
Based on the above loss estimates, management determined its best estimate
of the required allowance for loans and leases. Management's evaluation
of the factors described above resulted in an allowance for loan and lease
losses of $368.8 million or 1.05% of loans and leases outstanding at March
31, 2006. The allowance for loan and lease losses was $363.8 million or
1.06% of loans and leases outstanding at December 31, 2005 and $358.3
million or 1.17% of loans and leases outstanding at March 31, 2005.
Consistent with the credit quality trends noted above, the provision for
loan and lease losses amounted to $11.0 million for the three months ended
March 31, 2006 compared to $8.1 million for the three months ended March
31, 2005. The resulting provisions for loan and lease losses are the
amounts required to establish the allowance for loan and lease losses at
the required level after considering charge-offs and recoveries.
Management recognizes there are significant estimates in the process and
the ultimate losses could be significantly different from those currently
estimated.
The Corporation has not materially changed any aspect of its overall
approach in the determination of the allowance for loan and lease losses.
There have been no material changes in assumptions or estimation
techniques as compared to prior periods that impacted the determination of
the current period allowance. However, on an on-going basis the
Corporation continues to refine the methods used in determining
management's best estimate of the allowance for loan and lease losses.
Capitalized Software and Conversion Costs
-----------------------------------------
Direct costs associated with the production of computer software that will
be licensed externally or used in a service bureau environment are
capitalized. Capitalization of such costs is subject to strict accounting
policy criteria, although the appropriate time to initiate capitalization
requires management judgment. Once the specific capitalized project is
put into production, the software cost is amortized over its estimated
useful life, generally four years. Each quarter, the Corporation performs
net realizable value tests to ensure the assets are recoverable. Such
tests require management judgment as to the future sales and profitability
of a particular product which involves, in some cases, multi-year
projections. Technology changes and changes in customer requirements can
have a significant impact on the recoverability of these assets and can be
difficult to predict. Should significant adverse changes occur, estimates
of useful life may have to be revised or write-offs would be required to
recognize impairment. For the three months ended March 31, 2006 and 2005,
the amount of software costs capitalized amounted to $11.3 million and
$9.0 million, respectively. Amortization expense of software costs
amounted to $14.1 million for the three months ended March 31, 2006
compared to $14.9 million for the three months ended March 31, 2005.
Direct costs associated with customer system conversions to the data
processing operations are capitalized and amortized on a straight-line
basis over the terms, generally five to seven years, of the related
servicing contracts.
Capitalization only occurs when management is satisfied that such costs
are recoverable through future operations or penalties (buyout fees) in
case of early termination. For the three months ended March 31, 2006 and
2005, the amount of conversion costs capitalized amounted to $2.4 million
and $2.9 million, respectively. Amortization expense of conversion costs
amounted to $2.3 million and $2.8 million for the three months ended March
31, 2006 and 2005, respectively.
Net unamortized costs were ($ in millions):
March 31,
--------------------------
2006 2005
------------ ------------
Software $ 152.6 $ 157.2
Conversions 26.9 26.7
----------- -----------
Total $ 179.5 $ 183.9
=========== ===========
36
The Corporation has not substantively changed any aspect of its overall
approach in the determination of the amount of costs that are capitalized
for software development or conversion activities. There have been no
material changes in assumptions or estimation techniques as compared to
prior periods that impacted the determination of the periodic amortization
of such costs.
Financial Asset Sales and Securitizations
-----------------------------------------
The Corporation utilizes certain financing arrangements to meet its
balance sheet management, funding, liquidity, and market or credit risk
management needs. The majority of these activities are basic term or
revolving securitization vehicles. These vehicles are generally funded
through term-amortizing debt structures or with short term commercial
paper designed to be paid off based on the underlying cash flows of the
assets securitized. These financing entities are contractually limited to
a narrow range of activities that facilitate the transfer of or access to
various types of assets or financial instruments. In certain situations,
the Corporation provides liquidity and/or loss protection agreements. In
determining whether the financing entity should be consolidated, the
Corporation considers whether the entity is a qualifying special-purpose
entity ("QSPE") as defined in Statement of Financial Accounting Standards
("SFAS") No. 140, Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities. For non-consolidation, a QSPE
must be demonstrably distinct, have significantly limited permitted
activities, hold assets that are restricted to transferred financial
assets and related assets, and can sell or dispose of non-cash financial
assets only in response to specified conditions.
In December 2003, the Corporation adopted Financial Accounting Standards
Board Interpretation No. 46 ("FIN 46R"), Consolidation of Variable
Interest Entities (revised December 2003). This interpretation addresses
consolidation by business enterprises of variable interest entities.
Transferors to QSPEs and "grandfathered" QSPEs subject to the reporting
requirements of SFAS 140 are outside the scope of FIN 46R and do not
consolidate those entities. With respect to the Corporation's
securitization activities, the adoption of FIN 46R did not have an impact
on its consolidated financial statements because its transfers are
generally to QSPEs.
The Corporation sells financial assets in a two-step process that results
in a surrender of control over the assets as evidenced by true-sale
opinions from legal counsel, to unconsolidated entities that securitize
the assets. The Corporation retains interests in the securitized assets
in the form of interest-only strips and a cash reserve account. Gain or
loss on sale of the assets depends in part on the carrying amount assigned
to the assets sold allocated between the asset sold and retained interests
based on their relative fair values at the date of transfer. The value of
the retained interests is based on the present value of expected cash
flows estimated using management's best estimates of the key assumptions -
credit losses, prepayment speeds, forward yield curves and discount rates
commensurate with the risks involved. Actual results can differ from
expected results.
The Corporation reviews the carrying values of the retained interests
monthly to determine if there is a decline in value that is other than
temporary and periodically reviews the propriety of the assumptions used
based on current historical experience as well as the sensitivities of the
carrying value of the retained interests to adverse changes in the key
assumptions. The Corporation believes that its estimates result in a
reasonable carrying value of the retained interests.
The Corporation regularly sells automobile loans to an unconsolidated
multi-seller special purpose entity commercial paper conduit in
securitization transactions in which servicing responsibilities and
subordinated interests are retained. The outstanding balances of
automobile loans sold in these securitization transactions were $985.0
million at March 31, 2006. At March 31, 2006 the carrying amount of
retained interests amounted to $30.2 million.
The Corporation also sells, from time to time, debt securities classified
as available for sale that are highly rated to an unconsolidated
bankruptcy remote QSPE whose activities are limited to issuing highly
rated asset-backed commercial paper with maturities up to 180 days which
is used to finance the purchase of the investment securities. The
Corporation provides liquidity back-up in the form of Liquidity Purchase
Agreements. In addition, the Corporation acts as counterparty to interest
rate swaps that enable the QSPE to hedge its interest rate risk. Such
swaps are designated as free-standing derivative financial instruments in
the Corporation's Consolidated Balance Sheet.
At March 31, 2006, highly rated investment securities in the amount of
$282.7 million were outstanding in the QSPE to support the outstanding
commercial paper.
Income Taxes
------------
Income taxes are accounted for using the asset and liability method.
Under this method, deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities
and their respective tax basis. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in
the years in which those temporary differences are expected to be
recovered or settled. The effect on tax assets and liabilities of a
change in tax rates is recognized in the income statement in the period
that includes the enactment date.
37
The determination of current and deferred income taxes is based on complex
analyses of many factors, including interpretation of Federal and state
income tax laws, the difference between tax and financial reporting basis
of assets and liabilities (temporary differences), estimates of amounts
currently due or owed, such as the timing of reversals of temporary
differences and current accounting standards. The Federal and state
taxing authorities who make assessments based on their determination of
tax laws periodically review the Corporation's interpretation of Federal
and state income tax laws. Tax liabilities could differ significantly
from the estimates and interpretations used in determining the current and
deferred income tax liabilities based on the completion of taxing
authority examinations.
FORWARD-LOOKING STATEMENTS
--------------------------
Items 2 and 3 of this Form 10-Q, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Quantitative and
Qualitative Disclosures about Market Risk," respectively, contain forward-
looking statements within the meaning of the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. Such forward-looking
statements include, without limitation, statements regarding expected
financial and operating activities and results which are preceded by words
such as "expects", "anticipates" or "believes". Such statements are
subject to important factors that could cause the Corporation's actual
results to differ materially from those anticipated by the forward-looking
statements. These factors include those referenced in Item 1A, Risk
Factors, of the Corporation's Annual Report on Form 10-K for the year
ended December 31, 2005 and under the heading "Forward-Looking
Statements," and as may be described from time to time in the
Corporation's subsequent SEC filings, and such factors are incorporated
herein by reference.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following updated information should be read in conjunction with the
Corporation's Annual Report on Form 10-K for the year ended December 31,
2005. Updated information regarding the Corporation's use of derivative
financial instruments is contained in Note 12, Notes to Financial
Statements contained in Item 1 herein.
Market risk arises from exposure to changes in interest rates, exchange
rates, commodity prices, and other relevant market rate or price risk.
The Corporation faces market risk through trading and other than trading
activities. While market risk that arises from trading activities in the
form of foreign exchange and interest rate risk is immaterial to the
Corporation, market risk from other than trading activities in the form of
interest rate risk is measured and managed through a number of methods.
Interest Rate Risk
------------------
The Corporation uses financial modeling techniques to identify potential
changes in income under a variety of possible interest rate scenarios.
Financial institutions, by their nature, bear interest rate and liquidity
risk as a necessary part of the business of managing financial assets and
liabilities. The Corporation has designed strategies to limit these risks
within prudent parameters and identify appropriate risk/reward tradeoffs
in the financial structure of the balance sheet.
The financial models identify the specific cash flows, repricing timing
and embedded option characteristics of the assets and liabilities held by
the Corporation. Policies are in place to assure that neither earnings
nor fair value at risk exceed appropriate limits. The use of a limited
array of derivative financial instruments has allowed the Corporation to
achieve the desired balance sheet repricing structure while simultaneously
meeting the desired objectives of both its borrowing and depositing
customers.
The models used include measures of the expected repricing characteristics
of administered rate (NOW, savings and money market accounts) and non-rate
related products (demand deposit accounts, other assets and other
liabilities). These measures recognize the relative insensitivity of
these accounts to changes in market interest rates, as demonstrated
through current and historical experiences. In addition to contractual
payment information for most other assets and liabilities, the models also
include estimates of expected prepayment characteristics for those items
that are likely to materially change their payment structures in different
rate environments, including residential mortgage products, certain
commercial and commercial real estate loans and certain mortgage-related
securities. Estimates for these sensitivities are based on industry
assessments and are substantially driven by the differential between the
contractual coupon of the item and current market rates for similar
products.
38
This information is incorporated into a model that allows the projection
of future income levels in several different interest rate environments.
Earnings at risk are calculated by modeling income in an environment where
rates remain constant, and comparing this result to income in a different
rate environment, and then dividing this difference by the Corporation's
budgeted operating income before taxes for the calendar year. Since
future interest rate moves are difficult to predict, the following table
presents two potential scenarios - a gradual increase of 100bp across the
entire yield curve over the course of the year (+25bp per quarter), and a
gradual decrease of 100bp across the entire yield curve over the course of
the year (-25bp per quarter) for the balance sheet as of the indicated
dates:
Impact to Annual Pretax Income as of
----------------------------------------------------------------
March 31, December 31, September 30, June 30, March 31,
2006 2005 2005 2005 2005
------------ ------------ ------------- ------------ -----------
Hypothetical Change in Interest Rate
------------------------------------
100 basis point gradual:
Rise in rates (0.2)% (0.2)% (0.1)% 0.3 % (0.2)%
Decline in rates 0.1 % 0.0 % 0.0 % (0.6)% 0.3 %
These results are based solely on the modeled parallel changes in market
rates, and do not reflect the earnings sensitivity that may arise from
other factors such as changes in the shape of the yield curve and changes
in spread between key market rates. These results also do not include any
management action to mitigate potential income variances within the
simulation process. Such action could potentially include, but would not
be limited to, adjustments to the repricing characteristics of any on- or
off-balance sheet item with regard to short-term rate projections and
current market value assessments.
Actual results will differ from simulated results due to the timing,
magnitude, and frequency of interest rate changes as well as changes in
market conditions and management strategies.
Another component of interest rate risk is measuring the fair value at
risk for a given change in market interest rates. The Corporation also
uses computer modeling techniques to determine the present value of all
asset and liability cash flows (both on- and off-balance sheet), adjusted
for prepayment expectations, using a market discount rate. The net change
in the present value of the asset and liability cash flows in different
market rate environments is the amount of fair value at risk from those
rate movements. As of March 31, 2006, the fair value of equity at risk
for a gradual 100bp shift in rates was no more than 2.0% of the market
value of the Corporation.
Equity Risk
-----------
In addition to interest rate risk, the Corporation incurs market risk in
the form of equity risk. The Corporation invests directly and indirectly
through investment funds, in private medium-sized companies to help
establish new businesses or recapitalize existing ones. These investments
expose the Corporation to the change in equity values for the portfolio
companies. However, fair values are difficult to determine until an
actual sale or liquidation transaction actually occurs. At March 31,
2006, the carrying value of total active capital markets investments
amounted to approximately $44.0 million.
As of March 31, 2006, M&I Trust Services administered $86.2 billion in
assets and directly managed a portfolio of $19.8 billion. The Corporation
is exposed to changes in equity values due to the fact that fee income is
partially based on equity balances. Quantification of this exposure is
difficult due to the number of other variables affecting fee income.
Interest rate changes can also have an effect on fee income for the above
stated reasons.
ITEM 4. CONTROLS AND PROCEDURES
We maintain a set of disclosure controls and procedures that are designed
to ensure that information required to be disclosed by us in the reports
filed by us under the Securities Exchange Act of 1934, as amended, is
recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms. We carried out an evaluation,
under the supervision and with the participation of our management,
including our Chief Executive Officer and our President and Chief
Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures pursuant to Rule 13a-15 of the Exchange
Act. Based on that evaluation, our Chief Executive Officer and our
President and Chief Financial Officer concluded that our disclosure
controls and procedures are effective as of the end of the period covered
by this report.
There have been no changes in our internal control over financial
reporting identified in connection with the evaluation discussed above
that occurred during our last fiscal quarter that have materially
affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
39
PART II - OTHER INFORMATION
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table reflects the purchases of Marshall & Ilsley
Corporation stock for the specified period:
Total Number of Maximum Number
Shares Purchased of Shares that
as Part of May Yet Be
Total Number Average of Publicly Purchased Under
of Shares Price Paid Announced Plans the Plans
Period Purchased(1) per Share or Programs or Programs
----------------- ------------- ----------- ------------------ -----------------
January 1 to
January 31, 2006 443,919 $ 41.92 437,700 11,562,300
February 1 to
February 28, 2006 565,972 41.70 562,300 11,000,000
March 1 to
March 31, 2006 2,434 41.84 -- 11,000,000
------------ ---------- ----------------
Total 1,012,325 $ 41.80 1,000,000
============ ========== ================
(1) Includes shares purchased by rabbi trusts pursuant to nonqualified
deferred compensation plans.
The Corporation's Share Repurchase Program was publicly reconfirmed in
April 2005 and again in April 2006. The Share Repurchase Program
authorizes the purchase of up to 12 million shares annually and renews
each year at that level unless changed or terminated by subsequent Board
action.
40
ITEM 6. EXHIBITS
Exhibit 10 - Change of Control Agreement dated
March 13, 2006 between the Corporation
and Michael C. Smith.
Exhibit 11 - Statement Regarding Computation of Earnings
Per Share, Incorporated by Reference to NOTE 4
of Notes to Financial Statements contained in
Item 1 - Financial Statements (unaudited) of
Part I - Financial Information herein.
Exhibit 12 - Statement Regarding Computation of Ratio of
Earnings to Fixed Charges
Exhibit 31(a) - Certification of Chief Executive Officer
pursuant to Rule 13a-14(a) under the Securities
Exchange Act of 1934, as amended.
Exhibit 31(b) - Certification of Chief Financial Officer
pursuant to Rule 13a-14(a) under the Securities
Exchange Act of 1934, as amended.
Exhibit 32(a) - Certification of Chief Executive Officer
pursuant to 18 U.S.C. Section 1350.
Exhibit 32(b) - Certification of Chief Financial Officer
pursuant to 18 U.S.C. Section 1350.
41
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MARSHALL & ILSLEY CORPORATION
(Registrant)
/s/ Patricia R. Justiliano
__________________________________
Patricia R. Justiliano
Senior Vice President and
Corporate Controller
(Chief Accounting Officer)
/s/ James E. Sandy
__________________________________
James E. Sandy
Vice President
May 10, 2006
42
EXHIBIT INDEX
-------------
Exhibit Number Description of Exhibit
______________ ____________________________________________
(10) Change of Control Agreement dated
March 13, 2006 between the Corporation
and Michael C. Smith.
(11) Statement Regarding Computation of Earnings
Per Share, Incorporated by Reference to
NOTE 4 of Notes to Financial Statements
contained in Item 1 - Financial Statements
(unaudited) of Part I - Financial Information
herein.
(12) Statement Regarding Computation of Ratio
of Earnings to Fixed Charges.
(31)(a) Certification of Chief Executive Officer
pursuant to Rule 13a-14(a) under the
Securities Exchange Act of 1934, as amended.
(31)(b) Certification of Chief Financial Officer
pursuant to Rule 13a-14(a) under the
Securities Exchange Act of 1934, as amended.
(32)(a) Certification of Chief Executive Officer
pursuant to 18 U.S.C. Section 1350.
(32)(b) Certification of Chief Financial Officer
pursuant to 18 U.S.C. Section 1350.