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Executives

Mark Furlong - Chief Executive Officer, President, Director, Chairman of M&I Marshall & Ilsley Bank, Chief Executive Officer of M&I Marshall & Ilsley Bank, President 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

David Urban - Vice President and Director of Investor Relations

Michael Smith - Senior Vice President, Corporate Treasurer and Senior Vice President of M&I Marshall & Ilsley Bank

Gregory Smith - Chief Financial Officer, Senior Vice President and Chief Financial Officer of M&I Marshall & Ilsley Bank

Analysts

Craig Siegenthaler - Crédit Suisse AG

Jon Arfstrom - RBC Capital Markets Corporation

Anthony Davis - Stifel, Nicolaus & Co., Inc.

Elena Kim - Merrill Lynch

Robert Patten - Morgan Keegan & Company, Inc.

Steven Alexopoulos - JP Morgan Chase & Co

Terence McEvoy - Oppenheimer & Co. Inc.

Stephen Scinicariello

Ken Zerbe

Marshall & Ilsley (MI) Q3 2010 Earnings Call October 20, 2010 12:00 PM ET

Operator

Welcome to M&I's third quarter 2010 results conference. My name is Talvis, and I will be a conference operator today. [Operator Instructions] It is now my pleasure to introduce Dave Urban, Director of Investor Relations for M&I. Sir, you may begin your conference.

David Urban

Thank you, and welcome to M&I's Third Quarter 2010 Financial Results Conference Call. The presenter for today's call will be Greg Smith, our Chief Financial Officer, who will review the third quarter financial results. At the end of our prepared remarks, Greg, Mark Furlong, our Chairman and Chief Executive Officer; and Mark Hogan, our Chief Credit Officer will be available for your questions.

Before we begin, let me make a few preliminary comments. If you have not read our release, you may access it, along with supplemental financial information from the Investor Relations section of our website at www.micorp.com. Also, before we start, I would like to mention that comments made during this call contains forward-looking statements concerning M&I's future operations and financial results. Such statements are subject to important factors, which could cause M&I's actual results to differ materially from those anticipated by the forward-looking statements. These factors are described in M&I's most recent Form 10-K and M&I's other SEC filings. Such factors are incorporated herein by reference. For a reconciliation of any non-GAAP financial measures mentioned in this presentation to the most comparable financial measures calculated in accordance with GAAP, please refer to M&I's website at www.micorp.com.

And now I will turn the call over to Greg.

Gregory Smith

Thank you, Dave. Good morning, everybody, and thank you for joining us today. By now you've had an opportunity to see our press release and supplemental financial information. We have included detailed slides on our website, which you may want to have available for later in our discussion.

Our third quarter results provide us with continued confidence that a recovery is underway at M&I. Our credit quality trends continue to stabilize as shown by continued lower levels of loans going into non-performing status in comparison to the prior year, continued low levels of early-stage delinquencies, continued improvement in total non-performing loans, which increased for the fifth consecutive quarter and are at our lowest levels since 2008. The important items are spoken on to better understand the third quarter performance include the following: A loss this quarter is in line with the prior quarter and substantially less than the third quarter last year. Our credit quality improvement this quarter has been masked by steps we have taken that bring one sizable hospitality relationship to find a resolution. Recall that we have discussed this credit in previous call going back to the second quarter of last year. Related to this relationship, in this quarter, we moved to the remaining $83 million from renegotiate to non-accrual, charged off $201 million across all properties, $86 million of which required incremental loan loss provision.

We now carry these 10 properties at a substantial discount to unpaid principal balance, which we'd establish using the lowest end of any valuation range. The incremental provision associated with this hospitality relationship cost us $0.10 per share. This quarter, net charge-offs totaled $560 million. Excluding the hospitality relationship, charge-offs would have been $359 million, our lowest level since the third quarter of 2009. Similarly, without this relationship, our loan loss provision would have been a $346 million, our lowest level since the third quarter of 2008. This is 21% below last quarter.

Non-performing loans were down $203 million this quarter. From our high in June 2009, non-performing loans are down 34%. We continue to see stabilization in our NPL formation trends. This quarter, we revised approximately $700 million of new non-performing loans, which is higher than the prior quarter. Included in this inflow is $148 million in previously renegotiated loans, which masks the $559 million of core new inflows and is 4% better than last quarter. With the movement of these renegotiated commercial loans to NPL status, we now have only $131 million in remaining commercial and Commercial Real Estate renegotiated loans. We will be less likely to renegotiate significant amounts of commercial and Commercial Real Estate loans going forward. The Economy has proven that once a degree of stress reaches a real estate project, the likelihood of a successful outcome is greatly diminished. On the other hand, we are pleased with our success in restructuring consumer home mortgages.

On a linked quarter basis, non-performing loans declined 11% while non-performing assets declined 10%. If you include renegotiated loans in non-performing loans and non-performing assets, the declines are 15% and 13%, respectively. For the quarter, early-stage loan delinquencies, those performing loans past due 30 to 89 days increased slightly but remained at levels not seen since 2007.

Our non-performing Construction & Development loans were down $32 million this quarter or 6% from June 30. Approximately 44% of this decrease is attributable to the Arizona market where our non-performing Construction & Development loans are less than $100 million. We have reduced our concentration of Construction & Development loans to approximately 9% of total loans, compared to nearly 23% at a tie in the third quarter of 2007. As we have noted many times before, we expect continued construct contraction in this portfolio, reflecting the reality of this economic environment.

For the quarter, charge offs exceeded provisions by $128 million. This reduction in the reserve is the result of charging down loans that already had specific reserves and is almost entirely related to the single hospitality relationship. We do not expect a sustained trend declines in the loan loss reserve just yet. Our reserve now stands at 3.49% of total loans.

We continue to make progress in improving our funding profile. Our loan-to-deposit ratio stands at 104%, highlighting the substantial progress we made since our tie of 132% in 2007. During the quarter, we revised securities and other net gains for $43 million. These gains were partially offset by the non-cash expense of $29 million to terminate $2.3 billion in the wholesale CDs. We continue to maintain a strong capital base with a tangible common equity ratio of 8.3% and an estimated Tier 1 risk-based capital ratio of 10.8%.

Now for some additional insights into the quarter. First, the net interest margin. Our net interest margin decreased by three basis points on a linked quarter basis to 3.14%. For the quarter, our net interest margin benefited from an improved funding mix, but was constrained by higher-than-anticipated cash balances. Like other banks, we only earn 25 basis points on our excess cash balances held at the Fed. Despite recent asset quality improvements, our margin continues to be negatively impacted by non-performing assets. The negative impact is 26 basis points in total. We continue to expect net interest margin will remain in this area for the near term with deposit and longer-term upward trend. Many variables continue to impact margin including competitive pricing and the influence of deposit and loan floors. It is difficult to project this one data point with a high degree of accuracy given the current yield curve and competitive environment.

Now moving on to the Wealth Management segment. For the quarter, strong sales and client retention push revenues higher by 4% compared to the third quarter of 2009. On a link quarter basis, revenues were up slightly. Our continued strong Asset Management performance drove new relationships and sales and continues to positively impact our pipelines. Overall, fee income continued to expand as reflected in sales and pipeline growth in both institutional and personal business lines. Aggressive management of our Private Banking portfolios resulted in reduced charge offs and delinquencies as evidenced by a lower provision for the third quarter versus the second quarter and significantly lower versus the third quarter of last year.

In spite of accounting [ph] market conditions during the quarter, Assets under Management finished the quarter at $33 billion, up in comparison to both the prior year and the linked quarter. Assets under administration were $139 billion, up in comparison to the same periods. With strong investment performance and natural recognition, Wealth Management continues to expand its reach outside of our core footprint but more importantly, improving penetration with existing customers.

From a revenue standpoint, total noninterest expense amounted to $420 million in the third quarter. This includes the expense of the wholesale CD terminations discussed earlier, which amounted to $29 million for the quarter. Net expenses for non-performing assets and other current related items were $3.7 million [ph] this quarter. None the less, particularly in the current operating environment, M&I will continue to be very focused on maintaining our historical expense discipline. In the course of the upcoming quarter, we will review many aspects of our business to ensure that we're operating a more reasonable expense base.

Now moving on to our credit quality trends. Non-performing loans decreased for the fifth consecutive quarter, resulting in our lowest level of non-performing loans since the end of 2008. We anticipate continued improvement in our non-performing loan trends reflecting sustained improvement in early-stage delinquency, reduced inflows and continued aggressive strategy to work out or sell non-performing credits. We expect early stage accruing delinquent loans to remain in the low 1% area.

Our Commercial and Consumer portfolios continue to have non-performing characteristics better than the bank as a whole, while our Construction & Development loans continue to show stresses of national housing markets. Our core Wisconsin portfolio continues to perform well through the cycle as is highlighted by our 2% non-performing loan ratio. We have identified the specific loss content in non-accrual loans over $1 million, and more than the net realizable value with either a specific reserve or charge-off. As shown in Slide 8, M&I has conducted a specific impairment analysis of $1.1 billion or 67% of total non-performing loans to quantify potential impairment. On average, 38% of the unpaid principal balance of these loans has been charged off.

Related to the charge-offs, during the quarter, and adjusted for a hospitality relationship discussed earlier, we charged off $359 million, which is 18% below last quarter. Although the Arizona and Florida marketplaces continue to be the largest proportion of charge-offs, approximately 47%, not including the previously discussed hospitality relationship, they are decreasing as expected. As shown on Slide 33, the largest concentrations in net charge-offs by geographic location were $106 million for Arizona, which is at its lowest level since September of 2008 and $62 million for Florida.

Discussing our non-performing loan trends, during the quarter, our non-performing loans decreased $203 million, which is 11% below last quarter and 34% below our high watermark in the second quarter of 2009. For the quarter, we sold approximately $87 million in larger stressed Construction & Development loans. As in the past, we have moved aggressively to identify problem loans and the associated loss content. Of our non-performing loans, $648 million or 41% are past due less than 90 days. $448 million or 28% of total non-performing loans are current. Our new non-performing loan formation continue to stabilize this quarter with approximately $700 million moving to non-accrual status, of which $148 million were previously recognized as primarily three specific commercial renegotiated relationships.

We have already realized partial charge-offs of $821 million against our non-performing loans, representing a 34% haircut. Another way to look our partial charge-offs is that represents a 57% write down on specific non-performing loans where a direct write-down was deemed necessary. We continue to see notable contraction in our Residential Vacant Land portfolio, which has declined approximately 55% since September 2007 high watermark. Residential lot loans to individuals and developers account for $143 million of non-performing loans, which is down 22% from the prior quarter. Of our non-performing loans in this category, 42% are based in the Arizona market.

Shifting to the Commercial Loan portfolio, this portfolio continues to perform relatively well during this cycle, while still showing the effect of the economy. For the quarter, net charge-offs were $56 million, down substantially from the prior quarter, and non-performing C&I loans were down 6% from the prior quarter. With regard to our non-construction Commercial Real Estate portfolio, we have $13.1 billion outstanding with $3.5 billion in Multifamily and $8.8 billion in Business Real Estate. As shown on Slide 16, our Business Real Estate portfolio is generally concentrated in our core midwest markets, 2/3, with only 17% in our combined Florida and Arizona markets and another 3% in other higher-risk areas. 40% of this portfolio was owner-occupied.

In the third quarter, we saw our non-performing loans in the non-construction Commercial Real Estate category decreased to 3.7%. Like others, we continue to be watchful of this portfolio and continue to stay close to our borrowers. The delinquencies in this portfolio continue to be manageable with approximately $99 million of accruing notes or 0.8% of total performing Commercial Real Estate loans past due 30 to 89 days.

A few final comments on credit quality, we have and we'll continue to take aggressive steps to resolve our non-performing situations. We remain committed to returning M&I to a level of solid credit quality and expect that our declines in non-performing loans, relative stability in non-performing loan inflows and early-stage delinquencies are continuing indicators of achieving this goal. Changing focus to the organic balance sheet trends compared to the same quarter in 2009. C&I loans decrease as we continue to see stabilizing but low-lying utilization from existing customers, consistent with the slower economy. Across all of our Construction & Development category, what we have seen approximately $2.5 billion or 37% in average balance contraction since the third quarter of last year. At quarter end, Construction & Development loans accounted for approximately 9% of total loans, down from high of approximately 23% in the third quarter of 2007. Non-construction Commercial Real Estate loans decreased $700 million in comparison to the same quarter last year and decreased $348 million on a linked quarter basis. We expect this trend will continue.

On the deposit side, we can see the benefit from positive mix shift. In comparison to the same quarter last year, our core transaction deposits have increased by more than $2.5 billion or 12.2% while consistent with our strategy to improve our deposit mix, our time and wholesale deposits have contracted by $4.8 billion or 23.5%.

A few final comments. As we move into the fourth quarter of 2010, and to reiterate comments made earlier, not only do we expect our financial results to reflect the benefits of the aggressive credit steps we have taken, but also the challenges of the broader financial markets. As our credit quality trends continue to improve, our intention will increasingly shift to rebuilding our profitability profile. Nonetheless, we will not waiver in our credit quality focus.

This concludes our prepared remarks. Joining me now are Mark Furlong, our Chairman and CEO; and Mark Hogan, our Chief Credit Officer. During the Q&A session, Mark Furlong will be prepared to answer questions relating to both of today's press releases. Operator, you may open the line for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Tony Davis of Stifel, Nicolaus.

Anthony Davis - Stifel, Nicolaus & Co., Inc.

Greg, I recall in June quarter, you pulled through, I think it was about $70 million of problem loans that were still performing in the non-accrual. I just wondered if that this quarter's review result in a similar effect?

Gregory Smith

Tony, a little bit, but nowhere near the $70 million. This quarter, I think the focus was clearly much more on the hospitality relationship. There were a much smaller handful of credits that towards the end of the quarter that we did indeed. Go ahead and make the decision to put them on non-performer. It's not going to add up to the same $70 million we had last quarter, but there are a couple decent-sized once.

Anthony Davis - Stifel, Nicolaus & Co., Inc.

How much of the TDR pool is lifetime and therefore, unlikely to move off of restructured at year end? Can you give us some sense of that?

Gregory Smith

Yes, we can. If you give me just a moment on that, we can give that one to you.

Anthony Davis - Stifel, Nicolaus & Co., Inc.

And maybe to Mark Furlong while you're looking for that, you got couple of misuse [ph] going on to you, Mark, redesigning, redeveloping the product set for your markets in this efficiency push. I just wondered if you could give us some sense on where you are in both of those, and if it's likely we'll see some nonrecurring charges way at the year end?

Mark Furlong

I think too early to say that right now. It would depend on [indiscernible] but we don't have anything necessarily in the queue, but we'll -- this process just continues.

Anthony Davis - Stifel, Nicolaus & Co., Inc.

Finally, Greg, I just wondered, you talk about the shelf filing, your thoughts here on capital and TARP?

Gregory Smith

Tony, first of all, the shelf filing was nothing more than our existing shelf filing was scheduled to expire on, I think, it was November 6. So this was just really freshing that shelf filing and everything is almost exactly the same as it was in the prior. More broadly, in terms of capital and TARP, we are yet to engage in any meaningful dialogue with our regulators about TARP. We definitely need to be fair [ph]. Our TARP strategy, really isn't any different than what we've talked about in the past. First, we need to return to profitability before we start thinking about crossing that bridge. More broadly, in terms of capital, we continue to believe our capital levels are sufficient from our perspective. That said, we also continue to look at those capital levels in the broader context of the industry and, of course, there are points in time where there are some people out there who believe no capital level is going to be sufficient, but at least from a management perspective, we continue to believe our capital levels are more dynamic.

Operator

Your next question is from the line of Bob Patten, Morgan Keegan.

Robert Patten - Morgan Keegan & Company, Inc.

Greg, I've gotten a couple of questions already on the marks on non-performing loans, and I know what the macro mark is. But can you talk about some of your larger exposures? It seems like we took almost an 80% mark on that large relationship. And we just pulled up the commentaries back from the second quarter of '09 just to sort of go through it. Can you just give us a little color here on what the write-down processes was with this credit? Because you guys looked at it and as it's in different markets, I guess, you did a bulk sale because it seems like an awfully low price for this thing after all this time.

Mark Furlong

This is Mark Furlong. Well, it's kind of an evolving nature with [indiscernible] Over the year ago, the loan was restructed and their annuity initially started to form according to what we thought the performance level should be. Over the course of spring and summer, the performance level wasn't what we thought it should be and the borrower discussed with us some alternatives. And one of the alternatives was considering selling the property. And our view was that, that was probably the right decision, that if it wasn't going to perform throughout the summer. Anyway, it had not performed throughout the summer to a level we thought it should. So when they went to that exercise and we went through the valuation exercise prior to it going on the market, two industry experts were brought into the valuation. We took the lowest valuation of the two industry experts, so they did a low, medium and high, and that's what we booked to and then the reason was our experience has been -- that the valuation is coming closer to that. But there's also some element of conservatism. So at the unique onset [ph], it was a very long-term relationship, M&I and there is nothing that even resembles a relationship like this in the banks. So that's really how we got to that valuation. Had the property perform like it did last fall and continue to perform -- continuing to improving in the economy, that would have been necessary and I doubt that the sale would have been necessary. By the way, we agreed with the concept of selling the property. We believed that the value of the current debt level wouldn't sustain itself. So it would have been just prolonging the inevitable.

Anthony Davis - Stifel, Nicolaus & Co., Inc.

I guess just from a standpoint of your next three largest relationships in terms of issues in comparison?

Mark Furlong

In terms of issues, we don't have a larger relationship that is under that degree of stress. We'll have a relationship over $100 million that has maybe a property or two and if it has a little stress, but, frankly, they have performed relatively well. So there really isn't a sizable relationship per se that we feel like we have substantial collateral deficiency. They're not collateral dependent. The cash flow and they're on, by and large, most are on principal amortization. They may have the odd [ph] property here or there but it's not -- that has a short interest-only period. But there really isn't anything similar to this. So I wouldn't set any expectation out there that there's $100 million credit that's heading down the path to any resolution similar to this. We face various times of uncertainty in this cycle, but we don't end this quarter going into the fourth quarter thinking we have something we have to clean up in the fourth quarter.

Robert Patten - Morgan Keegan & Company, Inc.

And the deal closed that the property sold?

Mark Furlong

No, they're in the process, and they're getting bids in pricing as we speak. And, hopefully, that will occur and close in the fourth quarter. That adds a fair chance to it [ph].

Robert Patten - Morgan Keegan & Company, Inc.

Greg, one last question on -- any update on the DTA analysis in terms of how you guys are thinking?

Gregory Smith

Yes, we've gone through the DTA analysis yet again this quarter, and we continue to do that in pretty substantial detail. The messaging around the DTA is very similar to what we've said in the past given the change in the business and mix going forward. We continue to be comfortable as we go through the various analytical tests. We continue to be comfortable with our deferred tax asset. We continue to show utilization of that over timeframe that is less than the 20 years using some pretty conservative assumptions.

Gregory Smith

On that question of Tony Davis' earlier where I owed him an answer related to the lifetime TDRs, that number is going to be about $400 million to $450 million. That is completely on the consumer side of the business, and it just I would also note as it relates to our TDR activity, we have seen a market increase in terms of new TDRs even on the consumer side going forward. That's the end of what I wanted to add, operator.

Operator

The next question comes from the line of Terry McEvoy of Oppenheimer.

Terence McEvoy - Oppenheimer & Co. Inc.

Can you just talk about the decision for retiring the wholesale CDs and the $29 million charge, how you come about that decision? And I guess, the earned back period, when we expect to see the benefits of that decision?

Gregory Smith

Terry, in terms of the overall balance sheet, we continue to operate in an excess liquidity position and that has allowed us to continue focusing on improving our funding profile as you see with the improvement in core transaction deposits. Mike Smith, our Treasurer happens to be in the room at the moment and I was going to let Mike talk about the actual decisions on terminating the wholesale funding and the earn backs.

Michael Smith

It's actually pretty simple and you hit it on the head. It's a question of how you usually utilize the cash flow sort of payback period you have. So in other words, what's the best use of cash, and in this case, because the timing and the ability to call these at this time, this was the best thing to do. So I'll sit into the whole strategy basically you shrink in [ph] wholesale liabilities growing retail deposits while keeping the cash balance relatively flat. And you do have a payback period that's relatively short on this. It all makes a pretty good sense to take them down now.

Craig Siegenthaler - Crédit Suisse AG

And then could you talk about market penetration in Minneapolis, St. Louis and Indianapolis that's been seen from you guys over the last 12 months in terms of growth opportunities. And then as part of that question, could you just talk about defending your market position in Wisconsin? I know others are looking at Wisconsin as an opportunity for growth.

Mark Furlong

This is Mark Furlong again. They kind of comes in waves and so there were a couple acquisitions occurred over [ph] years ago here and there's nothing like the new entry to the market and they set a big goal. So this to start speaking first from Wisconsin's standpoint. So I think our team is more than up for the challenge to anyone that comes here that wants to take market share and I think you'll find us to be relatively aggressive in maintaining our market share here. Well you never let your guard down and you never want to get too arrogant aggregate about your position. And we feel pretty confident that we can work hard and maintain our position here. If you kind of just go around the markets of the three you mentioned, the Midwest, have all performed relatively well. The Minneapolis team has been with us by far the longest in through a merge of acquisitions. And they've performed well, both as a team, and is well in the market. And it really solidified the strong number three position there in the business community in terms of a lot of outbound calling and a lot of community involvement. So I think that they're going to continue to do well there. And we hope the few facilities there -- well of course, the last couple of years, they performed reasonably well despite a pretty tough economy. So I feel pretty confident that the Indianapolis market joined us last, come to St. Louis in just second, but the Indianapolis market joined us last. And they've really performed well during the recession. They had a couple of real estate credits, they had to deal with it by and large, had a clean portfolio, had done a lot of work on that portfolio before joining us. And they have continued to add some good names particularly in the business side throughout this recession. And they've been both C&Is, as well as a couple of Commercial Real Estate relationships that have performed well. I think that market will perform very well for us. So we have fair coverage of that market right now. So hopefully, we'll grow. And finally, St. Louis is kind of in between building [ph] this relatively long period of time since '03. And they have as well performed well. That economy has struggled, nothing like the fast growth economy in terms of real estate, but it's had kind of gone through the economic cycle as well due to their -- they've hung on to their relationships. And I think we're going to do well. I think all three of those markets outside Wisconsin will perform well for M&I. And we have a lot of penetration opportunity in the business since we have their side [ph]. I think we feel pretty good about how they perform during this economy and the ability to perform well coming out. I mean the key is holding on to the key relationship bankers as we go through this cycle and all three of those markets have done that pretty well

Operator

Your next question comes from the line of Ken Zerbe with Morgan Stanley.

Ken Zerbe

In terms, going back to that CD prepayments so to speak, do you have any more opportunity to repay higher cost CDs going forward?

Gregory Smith

We do, although not at the same volumes that we would have been able to terminate in the past quarter. We will continue to take advantage of those where the breakeven makes sense. And given the cash position of the company, we would certainly expect to do that. That said, the opportunity to do that is down dramatically from what it was ones was, Ken. At a tie point, we got close to $8 billion in terms of that wholesale funding vehicle today. It is close to $3 billion in total. So the opportunity is just going to be diminished going forward.

Ken Zerbe

So we've seen probably the majority of the benefit of the funding mix shift?

Gregory Smith

Well, I think you would continue seeing that through the next couple of quarters. I mean, this activity took place throughout the third quarter. Therefore, it's kind of averaged in, if you will. Through the course of the third quarter, you'll continue to see the remainder of that flow in, in the fourth quarter. In addition, we will still have some more terminations of these wholesale funding arrangements this coming quarter, which provides us incremental opportunity. In addition, we continue to have CDs repriced, which will provide us further opportunity on the funding side.

Ken Zerbe

Maybe if you don't mind, spell out a little more clearly the hospitality credit? Why you chose that $201 million of charge offs and why $86 million went to provision? And I think I understood correctly that you're actually trying to sell that right now or is being sold. Why not take the whole thing through charge-offs? And should we expect that provision to flow into charge-offs next quarter?

Mark Furlong

This is Mark Furlong again. Over a year ago, we booked -- approximately a year ago, we booked reserves on that of $115 million, so loan loss provision exits the charge-offs. And restructuring the notes, in the course of that restructuring, the properties began to form as we would expect that they would. But then as the season when those hospitality units should have been more productive, they were not. And we didn't believe that, that was going to change materially. But more importantly, the customer didn't believe that was going to change materially. And so we agreed with the customer's decision to put those for sale. So we had $115 million of reserve allocated specifically to those credits. We used two valuation experts. We recorded the value of the properties in our financial statements at the lowest end of the two valuation experts ranges and therefore required an additional $86 million of loan loss provision. So $115 million plus $86 million gives you the $201 million of reserve. Then we charged off that reserve because they believe that was a permanent impairment. If we've overstated -- should it sell in the fourth quarter, that would be a recovery. Our deal was that we weren't going to take the risk of having it as another valuation range, and maybe being more optimistic than situation warrants it. So we'll find out, I think, over the course of the next 30 to 60 days where that stands and hopefully, that will close in the fourth quarter.

Operator

Your next question is from the line of Jon Arfstrom with RBC Capital Markets.

Jon Arfstrom - RBC Capital Markets Corporation

On the inflows, it looks like Minnesota and Wisconsin had a little bit higher inflow numbers. It's not terribly material, but it looks like they're up. Do you have any story there?

Gregory Smith

Not particularly. In Minneapolis in specific, Jon, going back to an earlier question, there's a specific credit where we did move a couple of things in proactively at the end of the quarter. And then in terms of Wisconsin, when you think of Wisconsin from a business line perspective, the incremental two properties with that hospitality relationship, those properties had been on renegotiated status. Those moved in to non-performance. So that would also be an increment there.

Mark Furlong

Yes, specifically, one credit in Wisconsin for $35 million, we moved in there near the end of the quarter, and we reserved about a third of it. And it may have a positive outcome, but that was more an element of conservatism as we get to the end of the quarter in our view of where that crept [ph] is so they're not sitting in there without reserves. As you know, all these go through the reserve complete impairment analysis each quarter end. And so they go through a pretty rigorous assessment.

Jon Arfstrom - RBC Capital Markets Corporation

Mark, how do you feel about Wisconsin overall, the overall economic health of the State?

Mark Furlong

Actually, Wisconsin has performed, I think, very well during this cycle. We had a half a dozen or so developer relationships upside. I just mentioned one upside, that $35 million one. And I think the challenge there was too much -- with any of the developers, too much land. Most of our Commercial Real Estate portfolio here is income-producing. So that's quite performed well through the cycle. On the C&I side, I'd say that the bulk of the companies here are probably held, and I think they performed well during this cycle. They've maintained excess liquidity. They've always maintained this, but they maintained even more so during the decline in the economy. And I think it's in pretty good shape, and I think it will come back pretty quickly here. The benefit that Wisconsin has is where it would have been very hard, it's kind of three decades ago, to have diversified substantially well. Many companies still have some auto dependency. It's much less, and so they're not nearly as price sensitive anymore. And they show us going through the cycle. So I think the economy is in good shape. The rise in prices, results have benefited the farm community, which is a big part of this economy substantially during this cycle. Then you have a lot of farmers that look at our portfolio that have sold their crop forward and really locked in these gains. So now they have the gain books or they will get it booked. So I think there's lots of parts of the economy that will do well here. Unemployment is high, but it's not as high as it is nationally. And there's always some challenges going on in communities where we have struggling inner city. And we have a piece of that too. But by and large, I think it's in pretty good shape.

Operator

Your next question comes from the line of Steven Alexopoulos with JPMorgan.

Steven Alexopoulos - JP Morgan Chase & Co

Did you disclose the size of this credit that required the $200 million charge-off?

Mark Furlong

No, we didn't. We will when we're done. But the reason we didn't was because then, the potential buyer could back into and we accounted for and potentially use that negotiations where it's right [ph]. I know that no one would ever operate in that fashion, but just to avoid of getting in that situation, I'd just tell you that these are written down dramatically so there we would think the likelihood of anything significant occurring in the fourth quarter if these transactions came in culmination, anything materially negative in the financial business should be pretty remote.

Steven Alexopoulos - JP Morgan Chase & Co

Now do you have a contract in place to sell this in the fourth quarter? And now how do you know the value as where it is, below what your experts provided?

Mark Furlong

No, we don't have it. The process is just -- on the next 30 days or so, it's just kind of come to that process where the bids are in and the customer is looking at them, and we will have some say so in that process as well. So it's transpiring right now. And so there is no guarantee. We used two valuation experts, and they independently came to their own values. One working for us, one working for the customer, and we took the lowest end of the lowest range. So we didn't have [ph] a better way to justify how we would do that.

Gregory Smith

Steve, one thing to just add to this discussion, if in terms of the relative magnitude of this trend in comparison to other credit in our portfolio. If We go back to this credit in the middle of last year, it was the largest relationship in the portfolio by a factor of two. In other words, the next largest the relationship was slightly less than half its size.

Steven Alexopoulos - JP Morgan Chase & Co

Could you give some color on what's driving a change in the Chairman position here? As well as the Chief Credit Officer role? And maybe what was driving some of the management changes at the same time?

Mark Furlong

This is just kind of a normal time. That Dennis elected to step down as a Chairman, just normal retirement. And he'd been talking to me about it for probably two years, and was just trying to pick the right moment. Clearly, we're in a recovery stage at this point in time, and so we'll still remain active on board, but not the Chairman role. Mark has over three decades of time with M&I, and I just came to a point in this cycle where he wanted to step away and do some other stuff. And we talked him in to staying engaged with this through the end of the year and did an advisory role, so less time available to us in 2011. And so we think we can make that both [ph] in and we had a very capable executive and Ben Scruiter [ph] can step into that role immediately and bridge the GAAP while we do a search. In the meantime, we have the benefit of Mark in the house and that we're able to go through that exercise we think reasonably seamless. Tom Ellis' has been a high-performing executive, has worked in Milwaukee and then outside Milwaukee, led teams on the C&I side of the business. And more recently, spent the last couple of years on the retail side of the business and has been responsible with those teams, where some very positive movement in our retail deposit base. And so this is kind of been in the coming for probably 12 to 18 months or longer at least. So we thought that was the right time to go through that. We also have a couple of market presence that we announced this morning, that worked on the national transition of senior executives in their markets that were being promoted to take on roles within the company in the succession planning based on [indiscernible] over several years there position them well to be able to move the next executive into the market President role. We've gone through an exercise over the course of the last -- really on the course of 2010 in realigning our focus and customer segments, which is how we deliver our services. And in doing so, looked at the appropriate leadership in each one of those segments and each one of those businesses. And it was all coming to a head this quarter and decided that this is as good a time that they need to announce that as we continue to move forward. So that's really been kind of the driver of it. Any company has these cycles and certainly, it's been a rugged economic cycle for us, nothing like that before in the company's history. And we did a lot of bid order assessment as to what our strengths were in the markets and I think if you look at some of the acquisition activity that we have done prior to this economic cycle, as we went into some markets, I think we tried to be everything to everybody, and that probably wasn't the most effective strategy. So our reassessment helped us focus on more segments that we can go after successfully and deliver products and services that the customer wants in Wisconsin, but more tailored focus on the other markets where our market share is not as high and our presence to them [ph] is high. And then this exercise ins kind of culminated in that outcome, with this tailored focus on certain segments in certain markets, and where we think we can be successful and grow the business. So it means in some cases, maybe less people or facilities, but will be evaluated over a period of time. And everything had to align itself with the segment in each market that we're trying to attract. And I guess you'll see the M&I history has been somewhat built on the business segment, and that will continue to be a focus where we had great success and where we think we can lever the other parts of the business as well.

Steven Alexopoulos - JP Morgan Chase & Co

One final question on the margin, do you expect the decline in security deals this quarter to begin [ph] about 12 basis points? Should that continue into 4Q? And then why are you not seeing a reduction in your cost of time deposits? It seems to be pretty sticky at this 2.2% level.

Gregory Smith

Well, in terms of cost of time deposits, it takes time for those to roll off. I mean, there are CDs out over a period of time, some of these were originally five-year CDs, and it just takes time for those roll off. It's not so much -- the cost of the bucket of deposits, it's the fact that, that bucket of deposits continues to shrink where we will see the benefit in the margin going forward. In terms of the yield on the Securities portfolio, nothing in particular to comment on there. I think as we will forward, we are still reluctant to reinvest cash in what is incredibly low interest rate environment, reinvest cash in the Securities portfolio. That said, the trade-off is, we also want to make sure we enhance the earnings profile of the organization and those are the exact discussions that we have every single day about where the right trade-offs are in terms of building that portfolio back up.

Operator

Your next question comes from the line of Stephen Scinicariello with Macquarie Capital.

Stephen Scinicariello

The large hospitality relationship's skewed the line of the credit metrics this quarter, so I'm just hoping you could provide us with a little more color of kind of the overall concentration within the overall Loan portfolio? I know you gave some color regarding what was non-performing, but I'm just kind of curious if you could give us something to gauge potential future sensitivity to these types of things and then maybe, a number of credit relationships that are over $50 million or over $20 million? Or anything like that? or maybe segmented by area? Any kind of breakdown I think would be really helpful.

Mark Furlong

Let me start, Greg, while you're looking up a couple of things and Greg and Mark Hogan will, I'm sure, will have some comments. We have about 14 or 15 relationships that are kind of in that $100 million to $200 million range. This is the one that's set out there. Those are little bit larger and they were [ph] with the bank for a long, long time. In that mix, it's kind of a combination of real estate customers that have a lot of income-producing properties, a couple of order dealers, but performing pretty well this point in the cycle. Obviously, if they reached a little bit of stress earlier in the cycle, they're obviously profitable and doing well and cash flowing today. So while there is always a strain out of property here or there in one of the larger Commercial Real Estate Developer portfolio, by and large there because they're substantially income-producing, that in many cases, they're actually in pretty good shape. So overall, though they might have want to [ph] cut the strain, but the others are amortizing principal and interest so I think they're in pretty good shape. Mark and Greg, if you want to jump in and answer that.

Mark Hogan

This is Mark Hogan, I would say it on a more granular basis, we have fewer than 15 loans that are non-accruals that are greater than $10 million. And if you looked at our 10 largest non-accrual loan, they total less than 14% of the total amount of accrual loans. So that gives you some concept of the granularity. The largest amount of accrual loan is about $40 million, and the reserves, and the charge-offs that we've taken against those are consistent with the information that we talked about on a portfolio basis. So we feel that against this, from both from a size standpoint and from a reserve and in charge-off standpoint, these are the appropriate levels or marked at the appropriate levels --

Gregory Smith

In our Deck of Credit slide, starting around Slide 26 or 27, you can get a real good feel for where the concentrations of non-performers and charge-offs are. We still see a third of our non-performing loans coming from the Construction & Development category more broadly. So that on the one hand has come down, but still, certainly is a much more substantial contributor to non-performing loans than it is with the overall Loan portfolio given the construction is only now 9% of the Loan portfolio. You can also be see the geographic concentration of non-performing loans where, again, there is still, although it is coming down, there is still disproportionate percentage of loans coming from the Arizona part of our footprint and in then the charge-offs would show up toward the end of Appendix B in this slide. And that again would show as not only the impact of the one hospitality relationship, but also that we still have efficient level of charge-offs running through the Construction & Development portfolio although like the other categories, that, too, is starting to trend down.

Stephen Scinicariello

But of those kind of 14 or 15 kind of large relationships performing or non-performing or otherwise, any kind of geographic breakdown of that, that you could provide ?

Mark Furlong

Not without looking at the detail. I think that was not the graph or the pie chart that Greg alluded to are going to be representative of both on a specific basis as well though.

Gregory Smith

They are not sitting concentrated in Florida or Arizona or some other heavily-depressed market. They are relatively well diversified and none that are under any unusual amount of stress where the stand [ph] with deep devaluation on the markets so a lot of income-producing in there as well, too. So it's been [ph] cash flowing in time [ph] so that's why we'd say there's not a similar relationship outside that has a portfolio of properties that is under dressed.

Operator

[Operator Instructions] Your next question comes from the line of Heather Wolf with UBS.

Elena Kim - Merrill Lynch

This is actually Elena sitting in for Heather Wolf. I have a really quick question on your Investment Securities portfolio, do you have that current duration of that portfolio?

Gregory Smith

It's usually been running right about 2.3 years on that portfolio.

Elena Kim - Merrill Lynch

And then what percent of your loans currently are floating?

Gregory Smith

The floating portion of our Loan portfolio -- it's been running around -- it's running about 50%.

Mark Hogan

Duration on the portfolio, a whole in [ph] portfolio it it's less than a year so it's substantially, yes, performing.

Mark Furlong

And just with that, the one thing I would add is we've got about $11 billion of loans that have floors at this point in time. So that winds up being about 26%, 27% of the Loan portfolio, which floored.

Elena Kim - Merrill Lynch

And then the portion of your loan portfolio that suspects [ph], what would be the duration for that?

Mark Furlong

We'll have to come back with that...

Operator

And at this time, there are no questions. Presenters, do you have any closing remarks?

Gregory Smith

We appreciate everybody's time with M&I this morning and certainly if you think [ph] there are question, always feel free to reach out. Thank you for the time and interest today.

Operator

This concludes today's conference call. You may now disconnect.

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