4. BACKGROUND
Background – Due Diligence for Steve’s Ross’s Bank Acquisition Effort (Business week, December, 2009)
5. EXECUTIVESUMMARY
TARGET : Marshall & Ilsley
•Dominant banking franchise in attractive upper-Midwest market
•High-quality management and strong franchise, with stable ROE
averaging 16% from 2000-2007
•Stable base of low-cost deposits, with 30% share in Milwaukee,
and top 5 share in its top 5 markets
•Asset Management division ($33B AUM) generating stable profits
and cross-selling opportunities
•History of successful acquisitions (21 since 1989)
•Presence in fragmented and growing Minneapolis market. Option
to aggressively expand
•Fundamentally undervalued, at 0.7X TBV and 7X normalized
earnings
COMPANY AND STOCK INFORMATION
HQ Location
770 North Water Street
Milwaukee, WI 53202
DEAL
•$2.2 B private placement, giving SJB Bank 40.3% ownership of
M&I
•$1.7 B used to repay TARP and $0.5 B used to strengthening
capital adequacy
•Management underpaid relative to competitors. High
management incentive to increase stock price and shareholder
returns
STOCK INFORMATION
Price: $5.49 (Dec 03, 2010)
Stock Beta: 1.37
MKT Cap: $2.90B
9. DUEDILIGENCE
Due diligence summary
Credit Risk and Deposit Mix Key Points
Low Credit Risk
Favorable geographic mix
Limited exposure to high risk borrowers
Steady improvements in NPL
Diverse deposit mix
Large deposit base
Trending away from time deposits toward more stable demand deposits
Refocusing on strengths
18% Increase in Commercial Real Estate Lending
40% Decrease in Construction and Development Lending
Top 20 relationships only account for 5% of M&I Loan portfolio, limiting exposure to idiosyncratic
risk
Steady Fee Income generated by Wealth Management Business
Peer comparison
M&I reduced non performing loans by 32%, outperforming peers
11. DUEDILIGENCE
Credit Risk Profile - Total Loan Portfolio
• TOTAL LOANS at Sept, 2010: $39.7B
LOANS BY ASSET CLASS LOANS BY GEOGRAPHY
•Stressed AZ & FL loan portfolio, company focusing on return to core Midwestern market
12. DUEDILIGENCE
Credit Risk Profile - Loan Concentration and Change in NPL
• Top 20 relationships only account for 5% of M&I Loan portfolio, limiting exposure to
idiosyncratic risk
•M&I reduced non performing loans by 32%, outperforming peers
LOAN Concentration $39.7B as of Sept 2010 % Change in Non Performing Loans, 3Q10 vs. 2Q09
13. DUEDILIGENCE
Credit Risk Profile - NPL Portfolio
• TOTAL NON PERFORMING LOANS at Sept, 2010: $1.6B
NPL BY ASSET CLASS NPL BY GEOGRAPHY
14. DUEDILIGENCE
Credit Risk Profile - 6 Month Trends in Loan Portfolio
• 18% Increase in Commercial Real Estate Lending
•40% Decrease in Construction and Development Lending
0%
5%
10%
15%
20%
25%
30%
35%
Comm.Lending Res. RE Comm. RE C&D Consumer
Loan Portfolio (%)
March 2010 September 2010
15. DUEDILIGENCE
Credit Risk Profile - Steady Improvements in NPL
Inflows of non performing loans stabilizing Percentage of Non-performing loans decreasing
Loan loss reserves reaching adequate levels
16. DUEDILIGENCE
Credit Risk Profile - Construction and Development (C&D) Exposure
• Construction and Development (C&D) Loan Portfolio shrinking
Total C&D Loan = $3.6B (9.1% of total loans)
Total C&D Non performing loans = $529M (33% of
total NPLs)
C&D Loans have decreased by $6.8B (65%) vs. 1Q08
M&I slowly de-stressing loan portfolio as it strengthen
its balance sheet
TOTAL C&D LOAN: $3.6B NON PERFORMING C&D LOAN: $529M
17. DUEDILIGENCE
Credit Risk Profile - Commercial Real Estate Loans Exposure
• CRE Loan of $13B (33% of total loan)
• 40% of commercial real estate are owner occupied
• CRE Non performing loans make up ~30% of NPLs ($483MM)
TOTAL CRE LOANS: $13B NON PERFORMING CRE LOANS: $483M
18. DUEDILIGENCE
Bank Deposit Mix
• Funding Mix Strengthens Balance Sheet
•Solid Deposit Growth, Decrease in Time Deposits (Hot Money)
•Loans to Deposit Ratio down from 132 % to 104% in just over two years
Growth Vs. Prior Year Loans/Deposits
19. DUEDILIGENCE
Composition of MI’s Consolidated Average Deposits (2008 -2009)
• Overall increase of $1.6 billion or a 3.4% of credit balances
•Non Interest Balances and Interest Balances increased by 26.8% and 52.3% respectively
•M & I increased rates to attract more balances which impacts net interest margin
$7,429.50
$4,946.70
$10,462.70
$17,212.50
$563.90
Non Interest Bearing
Interest Bearing
Money Market
Time
Foreign
20. DUEDILIGENCE
Revenue Mix
Non-Interest and Fee Income Mix
•Ability to generate income despite challenging environment
•Fee Income is driven by Wealth Management Business (Not impacted by Financial Regulations)
Total Revenue (2004 – 2009) 9/09 YTD – 9/10 YTD Revenue Growth
21. DUEDILIGENCE
Net Interest Margin
• Ability to generate income despite challenging environment
• Shift in average deposit mix resulted on a positive impact on net interest margin
•General economic conditions affected net interest margins
Net Interest Margin (3Q08 – 3Q10)
22. DUEDILIGENCE
Expense Comparison
• One of the most expense disciplined banks in the industry
Non – Interest Expense/ Average Assets (9/10 TYD) PEER BANKS
ASBC: Associated Banc Corp
MTB: M&T Bank Corp.
CMA: Comerica Inc.
HBAN: Huntington Bankshares Inc.
SNV: Synovus Financial Corp.
KEY: Key Corp.
ZION: Zions Bancorporation
STI: SunTrust Bank
FITB: Fifth Third Bankcorp
BBT: BB&T Corp.
RF: Regions Financial Corp.
FHN: First Horizon National Corp.
23. DUEDILIGENCE
Peer Leading Tangible Common Equity (TCE) Ratio
• Funding Mix Strong TCE/TA ratio amongst peers.
•Tier 1 regulatory capital ratio was 11.11% or $2.5B billion in excess of the Federal Reserve
Board’s requirements
TCE/TA Adequate Tier 1 Capital Ratio
25. DUEDILIGENCE
Compensation Summary
•M&I Executives Underpaid Relative Peers Because of TARP Overhang
Name Title
2006
(USD)
2007
(USD)
2008
(USD)
2009
(USD) Comments
Greig, Paul Executive Chairman, Chief Executive
Officer, President, Member of Executive
Committee, Chairman of FirstMerit Bank
N A, Chief Executive Officer of FirstMerit
Bank N A and President of FirstMerit
Bank N A
1,024,169 1,710,828 1,716,861 1,094,334 Paid back TARP in '09
As Reported Total
compensation
2,205,723 3,360,676 4,854,513 5,907,300
Gusmus, Frank J. President of FTN Financial and President
of FTN Financial - Bank
- - 1,039,846 2,612,118 Owes 866 millionto TARP
As Reported Total
compensation
- - 1,524,509 4,252,808
Beideman, Paul S.
(Prior)
Former Chief Executive Officer of
Associated Bank National Association,
Director of Associate Trust Company,
Director of Associate Bank and Chairman
of Corporate Development Committee
1,333,815 1,442,308 1,072,307 900,000 Owes TARP 525 million, most
direct M&I competitor
As Reported Total
compensation
1,801,958 2,460,741 2,776,841 2,416,079
Gershen, Richard
Scott
Executive Vice President of Wealth
Management Services Division for City
National Bank and Director of Wealth
Management Services Division for City
National Bank
- - - 1,198,333 Repaid TARP in early '10
26. DUEDILIGENCE
Compensation Summary
Name Title 2006 (USD) 2007 (USD) 2008 (USD) 2009 (USD) Comments
Furlong, Mark F. Chairman, Chief Executive Officer,
President, Chairman of M&I
Marshall & Ilsley Bank, Chief
Executive Officer of M&I Marshall &
Ilsley Bank, Vice President of M&I
Capital Markets Group LLC,
Treasurer of M&I Capital Markets
Group LLC, Director of M&I Capital
Markets Group LLC and Director of
Marshall & Ilsley Trust Company
1,384,800 1,066,876 875,000 875,000 Owes 1.7 Billion to
TARP
Cooper, Bill Chairman and Chief Executive
Officer TCF Bank
44,000 44,000 - 1,376,923 Repaid TARP in '09
As Reported Total
compensation
- - 7,367,302 1,666,698
Simmons, H. H. Chairman, Chief Executive Officer,
President, Member of Executive
Committee and Chairman of Zions
First National Bank
1,500,000 850,000 875,000 875,000 Owes 1.4 Billion to
TARP
As Reported Total
compensation
2,296,100 1,597,961 1,499,926 1,373,352
29. BANKVALUATION
Stock Prices of Industry Comparables
•Tarp overhang and fear of increased asset write downs depressing stock price
•Pressure to generate better returns for Shareholders
0
20
40
60
80
100
120
12/4/2007
2/4/2008
4/4/2008
6/4/2008
8/4/2008
10/4/2008
12/4/2008
2/4/2009
4/4/2009
6/4/2009
8/4/2009
10/4/2009
12/4/2009
2/4/2010
4/4/2010
6/4/2010
8/4/2010
10/4/2010
NYSE:MI - Share Pricing NasdaqGS:ZION - Share Pricing
NYSE:CYN - Share Pricing NasdaqGS:ASBC - Share Pricing
30. BANKVALUATION
Deal Structure
• Deal structured as a private Placement of $2.2 B
•The infusion of $2.2 B will go towards repaying TARP and improving capital adequacy
•Proposed Private Placement will allow M&I to meet Basel III capital requirements without
losing deferred tax assets
•Risk of further deterioration of capital markets could impact liquidity
32. RECOMMENDATIONS
Risk & Mitigation
RISKS
•Increased write downs due to real estate exposure
•Macro economic conditions
•Profitability constraints related to changes in financial regulation
•Failure to achieve regulator approval on deal
•Further deterioration in Tier 1 asset ratio
MITIGATION
•Due diligence deep dive into loan portfolio
•Model potential gains resulting from SJB synergies related to real estate
33. RECOMMENDATIONS
Realign Business Model - Focus on Consumer and Business Segment
BUSINESS-to-BUSINESS (B2B)
•Increase pricing and efficiency in select regions
•Redefine appetite for commercial real estate
BUSINESS-to-CONSUMER (B2C)
•Target mass affluent and affluent customers for more complete relationship
•Focus mass banking efforts in Wisconsin and Indianapolis
FY 2006 FY 2007 FY 2008 FY 2009 Q1 2010 Q2 2010 Q3 10 Q4 10 FY 2010 FY 2011 FY 2012
Operating Efficiency
Ratio 51% 56% 57% 68% 63% 67% 69% 70% 67% 72% 65%
Source: Credit Suisse Equity Research Report, November 5th, 2010
0%
2%
4%
6%
8%
10%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Ytd
Avg
Wisconsin Unemployment Rate lags
recession…
6%
7%
8%
9%
10%
Jan Feb Mar Apr May Jun Jul Aug Sep Oct
...but is already improving in 2010