Marshall & Ilsley Corporation: Announces Third Quarter Results

MILWAUKEE, Oct. 16 /PRNewswire-FirstCall/ — Marshall & Ilsley Corporation (NYSE:MI) today reported 2006 third quarter core operating income of $210.9 million, or $0.81 per diluted share, as compared to $179.7 million, or $0.75 per diluted share, in the third quarter of 2005. The Corporation reported 2006 third quarter net income of $238.9 million, or $0.92 per diluted share. The $0.11 per diluted share difference between core operating income and net income as reported reflects an adjustment in the accounting treatment of derivatives used to manage interest rate risk as described in more detail below. Third quarter core operating income increased 17.4 percent over the same period in 2005.

Core operating income for the nine months ended September 30, 2006 was $601.4 million, or $2.38 per diluted share, compared to $528.7 million, or $2.25 per diluted share, in the nine months ended September 30, 2005. Net income for the nine months ended September 30, 2006 was $602.5 million, or $2.38 per diluted share.

Return on average assets based on core operating income for the third quarter was 1.53 percent, as compared to 1.62 percent for the same period in 2005. Return on average equity based on core operating income was 14.22 percent this quarter as compared to 15.85 percent for the third quarter of 2005.

The Corporation’s provision for loan and lease losses was $10.3 million in the third quarter of 2006, versus $9.9 million in the same period last year. Net charge-offs for the period were $8.1 million, or 0.08 percent of total average loans and leases outstanding this quarter, and $7.8 million a year ago or 0.10 percent of total average loans and leases. At September 30, 2006, the allowance for loan and lease losses was 1.01 percent of total loans and leases, compared to 1.09 percent a year earlier. Nonperforming loans and leases were 0.53 percent of total loans and leases at September 30, 2006, and 0.44 percent at September 30, 2005.

Assets at September 30, 2006 were $55.5 billion, compared to $45.0 billion at September 30, 2005. Book value per share was $23.51 at September 30, 2006, compared to $19.81 for the same date a year ago. Total loans and leases were $41.3 billion, compared to $33.1 billion at September 30, 2005.

Accounting Adjustment for Derivatives

The Corporation has elected early application of Staff Accounting Bulletin 108, and, as a result, has adjusted its opening financial position for 2006 and the financial results for the first two quarters of 2006 to reflect a change in its hedge accounting under Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities. The Corporation utilizes interest rate swaps to hedge its risk in connection with certain financial instruments, and the Corporation had applied hedge accounting under SFAS 133 to these transactions from inception. Due to the recent expansion of certain highly technical interpretations of SFAS 133, specifically hedge designation under the “matched-term” method, certain of the derivative transactions entered into by the Corporation do not qualify for hedge accounting. As a result, any fluctuation in the market value of the derivatives should have been recorded through the income statement with no corresponding offset to the hedged items, or accumulated other comprehensive income.

This adjustment results in Shareholders’ Equity at January 1, 2006 being reduced by $18.0 million, and earnings per diluted share for the first and second quarters of 2006 being reduced by $0.06 and $0.05, respectively.

The Corporation is taking various actions, including terminating existing swaps that no longer qualify for hedge accounting, such that the Corporation believes its financial results going forward will not be materially impacted by fluctuations in the market value of derivatives used to hedge interest rate risk. The Corporation expects that these actions will result in fourth quarter 2006 charges of approximately $0.03 per diluted share.

“Our issue relates strictly to the evolving accounting interpretations related to hedge accounting. It is important to understand that this adjustment does not impact our growth trends, our underlying credit quality, or our key performance ratios in any significant manner,” said Greg Smith, the Corporation’s chief financial officer.

Marshall & Ilsley Corporation (NYSE:MI) is a diversified financial services corporation headquartered in Milwaukee, Wis., with $55.5 billion in assets. Founded in 1847, M&I Marshall & Ilsley Bank is the largest Wisconsin- based bank. M&I Bank has 195 offices throughout the state. In addition, M&I has 42 locations throughout Arizona; 17 offices in Kansas City and nearby communities; 17 offices on Florida’s west coast; 16 offices in metropolitan Minneapolis/St. Paul, and one in Duluth, Minn.; three offices in Tulsa, Okla.; and one office in Las Vegas, Nev. M&I’s Southwest Bank subsidiary has 15 offices in the greater St. Louis area. Metavante Corporation, Marshall & Ilsley Corporation’s wholly owned technology subsidiary, provides virtually all of the technology an organization needs to offer financial services. M&I also provides trust and investment management, equipment leasing, mortgage banking, asset-based lending, financial planning, investments, and insurance services from offices throughout the country and on the Internet ( or M&I’s customer-based approach, internal growth, and strategic acquisitions have made M&I a nationally recognized leader in the financial services industry.

This press release contains non-GAAP financial measures. For a reconciliation of the non-GAAP financial measures to the comparable financial measures calculated in accordance with GAAP, please see the reconciliation table included in the attachment to this press release.

This press release contains forward-looking statements concerning M&I’s future operations and financial results. Such statements are subject to important factors that could cause M&I’s actual results to differ materially from those anticipated by the forward-looking statements. These factors include (i) the Risk Factors identified in Item 1A of M&I’s Annual Report on Form 10-K for the year ended December 31, 2005, which factors are incorporated herein by reference, and (ii) such other factors as may be described from time to time in M&I’s SEC filings.