Marshall & Ilsley Corporation, Q1 2008 Earnings Call Transcript

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Marshall & Ilsley Corporation (NYSE:MI)

Q1 2008 Earnings Call

April 15 2008 12:00 pm ET

Executives

Dave Urban - Director of Investor Relations

Gregory Smith - Chief Financial Officer, Senior Vice President

Mark Furlong - Chief Executive Officer

Analysts

Tim Derby - Morgan Stanley

Steven Alexopoulos - J.P. Morgan

John Arfstrom - RBC Capital Market

Brain Foran - Goldman Sachs

Terry McEvoy - Oppenheimer

Tony Davis - Stifel Nicolaus

Heather Wolf - Merrill Lynch

Rob Rutschow - Deutsche Bank

Eric Wasserstrom - UBS

Ken Usdin - Banc of America Securities

Operator

Welcome to M&I's First Quarter 2008 Earnings Conference Call. My name is Christen and I'll be your conference operator today. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded for replay purposes.

It is now my pleasure to introduce Dave Urban, Director of Investor Relations for M&I. Sir you may begin your conference.

Dave Urban - Director of Investor Relations

Welcome to M&I's first quarter 2008 earnings conference call. The presenter for today's call will be Greg Smith our Chief Financial Officer, who will review the first quarter finical results. At the end of our prepared remarks Greg and Mark Furlong our Chief Executive Officer will be available for your questions.

Before we begin, let me make a few preliminary comments. If you have not read our earnings 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 actually results to differ materially from those anticipated by the forwarding-looking statement. 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 the 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 - Chief Financial Officer, Senior Vice President

Thank you Dave and thank you everyone for taking the time to join us today. By now you've had an opportunity to see our press release and supplemental finical information. In addition we've included detailed credit quality slides on our website as we have in the past.

Our first quarter results reflect the challenging operating environment that confronts banks, though we continue to view our core businesses as having a good growth profile over time. Our financial results this quarter are reasonably straight forward and only include a couple of noteworthy new items. We won't go through them in detail, but they include the following after tax items: A pre-tax gain of 39 million from the redemption of 39% of our Visa shares and the related litigation reserve adjustments; and a 20 million tax benefit related to positive developments in the US tax court.

In addition our results this quarter reflect our continued aggressiveness in addressing our non-performing loan balances. Continued detailed reviews of our construction and development portfolios have lead us to incur further provisions and charges-offs this quarter. We will discuss our credit quality trends in more detail shortly.

We also closed and successfully converted the First Indiana acquisition this quarter. With the successful conversion we now have 32 M&I bank branches in the Indianapolis market. Although still early in this combination we are on plan for performance and cost saving targets. We continue to be impressed with the strength of the employee base in this growing market.

Now turning to our results; as highlighted in our press release, we reported $0.56 per share of earnings for the first quarter. In the same quarter last year, we reported $0.65 per share from continuing operations. As I discuss aspects of growth in our banking business from this point on, I will highlight organic growth for the combined franchise in an effort to give it clear picture as possible of the underline bank trends. Any balance sheet discussion comparing first quarter of 2008 with first quarter of 2007 will be adjusted for acquisitions of Excel, United Heritage and First Indiana.

Now for some additional insights into quarter; first the net interest margin. Our net interest margin decreased by 4 basis points on a linked quarter basis to 309. During the first quarter our margin was positively impacted by day count, but was negatively impacted by non-performing assets, the cash acquisition of First Indiana and our buy back activity.

Although we continue to manage our interest risk position to be near neutral over a one year period the rapid resetting of the Fed funds target rate in the earlier part of this quarter caused some pressure on the first quarter margin. We continue to expect that the net interest margin will experience slight compression. Like the industry in general, we expect to be challenged by competitive loan and deposit pricing the movement of new and existing deposits and the lower spread, higher yielding products and higher wholesale funding spreads. There continued to be many variables that impact margin making it difficult to project this one data point with a high degree of accuracy.

Now moving on to our wealth management segment; revenues continued their strong growth trend and were up 18% for the first quarter compared to the first quarter of 2007. On a linked basis the growth was 3%. Despite downward trending equity markets, we continued to attract assets for management and administration and closed the quarter at $26 billion and a $105 billion respectively.

During the quarter the S&P 500 was down approximately 10% and yet our equity balances remained essentially flat during the period. Sales activities in our regional wealth management offices and institutional trust businesses continued to grow and helped offset market decline. While growth in our securities lending area along with new relationships in our operations outsourcing business also contributed to the overall revenue lift for the quarter.

Sales pipelines remain strong and bode well for continued revenue growth. Customer assets in our brokerage business were approximately $9 billion at quarter end. We continued to add new financial advisors consistent with our expansion plans in Florida, Indianapolis and Kansas City. In addition we are expanding our product offerings to include personal lines insurance and are optimistic about sales and revenue opportunities in the near future.

Moving on to other fee income components; Service charges on deposits for the first quarter were $36 million. After adjusting for the acquisitions, service charges on deposits were up 13% from the same quarter of 2007. This increase is predominantly in our commercial division.

Mortgage loan closings for the first quarter were $1.4 billion, which was up approximately 32% from the fourth quarter. As we have shown in previous mortgage cycles, our focus on the production side of the business reduces the volatility of our mortgage revenue stream.

A comment on capital management; with a period end tangible common equity ratio of 7.8%, M&I remains one of the most highly capitalized domestic banks. As at the end of the year, our regulatory capital ratios are well above any regulatory thresholds. During the first quarter we repurchased approximately 4.8 million shares. We will continue to evaluate future buy back activities in light of market and economic conditions.

From an expense standpoint, total non-interest expense amounted to $316 million dollars in the first quarter. This is a $130 million decrease from the fourth quarter, which included the charitable contribution expenses, the debt termination loss and the Visa accrual, which in total amounted to approximately $125 million in the fourth quarter.

Our efficiency ratio for the quarter was 50.6% in comparison to 53.7% in the prior quarter. Without the Visa litigation reversal tied to IPO this quarter our efficiency ratio would have been 52.6%. As we have noted before, we are updating many of our internal systems and continuing to expand in markets outside Wisconsin this year in a disciplined manner.

Nonetheless particularly in the current operating environment M&I will continue to be very focused on maintaining our historical expense discipline. As it relates to taxes this quarter the corporation booked a $20 million tax benefit based on favorable developments related to a tax matter covering the years 1996 through 2007.

Now moving on to our credit quality trends; like other banks we have observed continued deterioration in the national real estate markets during the first quarter. In addition, we have noted some stress among our consumers with conventional non-accruals picking up, but with home equity remaining stronger than the overall back. Also on the positive side our commercial lending portfolio has maintained its strong credit quality profile with 35 basis points of non-performing loans.

During the quarter we realized net charge-offs of a $131 million. For the first quarter, we provided a $146 million for loan losses, which is $15 million in excess of net charge-offs. Our quarter end allowance was a 1.1% of total loans. With regard to our loan loss provision; our loan loss provision this quarter exceeded our earlier estimates as the residential real estate market continued to deteriorate. We saw further stress in the estimated collateral values and repayment abilities of some customers particularly some of our mid-sized local developers and generally at the consumer segment. As we look forward, we expect to continue taking aggressive steps to resolve our non-performing loans the proceeds from which will be redeployed in our businesses.

Our underlying economic assumption in taking these charges and provision is that the prevailing economic and national residential market conditions will last through year end and possibly into the first half of 2009.

As in the fourth quarter, the largest proportion of the charge-offs over 80% were associated with the former Gold Bank franchise on the West Coast of Florida, Arizona, and the correspondent portfolios. All of the West Coast of Florida relationships were originated prior to acquisition by M&I. The charge-offs by business were $46 million for the West Coast of Florida, $45 million for Arizona, and $15 million for our correspondent business.

Discussing our non-performing loan trends; during the quarter, our non-performing loans decreased a $138 million. Major drivers behind these included moving the Franklin relationship to accruing status, adding First Indiana $22 million of non-performing loans, and the sale of approximately 110 million in non-performing loans. Within our loan portfolios, we continue to focus on our residential-related construction and development portfolio. These loans are in both, our commercial real estate and residential real estate portfolios, depending on the underlying collateral. As of quarter end, we have $492 million in construction and development loans on non-performing status, representing 63% of our non-performing loans.

To provide a little more granularity on our mid-size local developer portfolio, the following may be helpful: Our largest non-performing loan is less than $15 million and as to a mid-size local developer for a residential development on the West Coast of Florida. We have 24 loans greater than $5 million on non-performing status and only six of these are in excess of $10 million.

We have seen deterioration in the residential construction by individuals and small developer and land portfolios during the first quarter. Combined these contribute a 160 million of non-performing loans of which 76% are based in Arizona. The loans in these portfolios are relatively modest in size. In recent months, we have refreshed both FICO scores and LTVs for the Arizona portfolios. FICO scores had declined slightly, but remained around 720. LTVs have moved higher. Construction loan still have a sizeable equity cushion, but land loans have moved to just over a 100% LTV.

M&I has 2.7 billion in residential landing construction loans to individuals and small developers. A $2 billion of that or 76% are located in Arizona. The bulk of the Arizona loans nearly 70% are in Maricopa County. The average land loan is around $210,000 while the average construction loan is approximately 475,000. The average non-performing loan in these categories is slightly higher than the average loan size. The average refreshed LTV for land loan is 104% and construction loan is 63%.

As we have noted before our residential vacant land portfolio is almost entirely zoned, entitled, and improved, as well as related to individuals. With regard to conventional mortgages, we have noted deterioration as individuals are feeling increased economic stress. As we have noted before, we maintained our underwriting discipline through the cycle, never originated subprime loans, and have avoided many of the more risky loan products.

Nonetheless during the quarter, our nonperforming residential loan totals have increased to $83 million. Within the residential portfolio, we have seen some deterioration in many of our markets, with the Arizona market being most notable. We will continue to evaluate the opportunity for further sales of non-performing assets and weigh that opportunity versus the cost of keeping those assets for a period of time. Sometimes the best resolution will be to take the underlying property and maximize our interest.

Now going back to the residential portfolio; we continue to aggressively monitor and manage this portfolio. We provide further granularity on our Arizona residential portfolio. The average loan and non-performing loan are both around 290,000. The average refresh FICO score on this portfolio is 719. The average updated LTV is 87%.

Just a couple of comments on our consumer loan trends as the overall consumer portfolio has maintained its non-performing loan levels before those, below those of the overall bank. As of quarter end, only 95 basis points were consumer loans were on non-performing status.

As we have noted in the past our credit quality experience with this portfolio has benefited from our historical practice is selling much of our production, as we did in 2005 and 2006. Looking forward we expect consumer non-accruals including both residential and home equity are likely to trend up reflecting continued consumer stress, although we expect that our ultimate losses will remain better than industry averages.

The Franklin relationship has performed according to the terms of debt restructuring agreement and has been returned to performing status during the first quarter. During the quarter we received $25 million in principal payments reducing our outstanding accruing balance from 224 million at the end of the year to a $199 million at March 31st. Similarly the non-accruing portion has been reduced from 5 million to $4 million. Although, we are pleased with the performance of the Franklin Credit, we continue to monitor its performance and underlying portfolio closely. In terms of the future we continue to expect to see non-performing loans and real estate owned balance to move upward.

As we have noted before, it is important to remember that most construction credits are complex that it will take time for us, for any lender to work through them. As I noted before we will continue to evaluate the opportunity for further sales of non-performing assets and weigh that opportunity versus the cost of keeping those assets for a period of time.

As we anticipated our REO increased this quarter to $178 million, which is up from $115 million in the prior quarter. Like our loan portfolio, our REO is also very granular. The largest REO property is a $19 million Florida based multi-family property. We have three additional commercial properties over $5 million. We continue to expect that REO balances will increase going forward and view this as a natural progression as we gain control of projects and move towards ultimate resolution. We will continue to aggressively manage our REO balances.

Few final comments on credit quality. Our loan portfolio and non-performing loans remain granular. Stresses in the national housing markets will continue to affect us and we will continue to address them proactively. We have and will continue to take aggressive steps to resolve our non-performing situations. Our non-performing loans continue to be concentrated in the construction related components of the commercial and residential real estate portfolios.

Although, we are not immune from consumer deterioration, we believe our residential and consumer portfolios will continue to perform better than the industry as a whole. We expected the commercial multi-family and non-residential commercial real estate portfolios will continue to perform well. We are committed to returning M&I to a level of solid credit quality.

Changing focus to the organic balance sheet growth trends, compared to same quarter in 2007. First Quarter 2008 average loans were $48.6 billion, which is 3.9 billion, or 9% higher than the first quarter of 2007 average. CNI loans increased on average by 1.5 billion or 12%. For 2008, we expect CNI loan growth to post growth rates in the mid single-digits.

Commercial real estate increased on average by $1.4 billion, or 9%. To repeat comments we made before, we continue to see softness in the construction market for mid size and smaller local residential developers and to some extent throughout the commercial real estate business. This is translated into slowing new construction throughout all of our markets, less investor activity in new construction units, and our expectation that CRE growth for 2008 will most likely be in the mid single-digit percentage range.

Fundamentals in the apartment, medical office, and warehousing segments are positive. Fundamental in hospitality are currently good, however, we anticipate softening reflecting the economy in general and high gas prices. Retail and office demonstrates softening.

On the deposit side there is really only a couple of things to note, as many trends remained consistent with prior quarters. We continue to open net new DDA accounts in the community division each month. Although, growing DDA balances has been more challenging ex customers have opted to move excess liquidity into higher rate products.

Non-interest bearing deposits seasonally declined compared to the fourth quarter of 2007. As we have seen in prior years, our DDA balances grew in the fourth quarter reflecting our usual seasonality. As in the past our DDA balances fell in the first quarter but by a smaller amount than in prior years. As we saw a strong DDA growth in March.

Reflecting recent deposit market dynamics, the increased level of high price competition has caused our bank issued deposits to be relatively flat in comparison to the first quarter of 2007, as we have maintained our pricing discipline.

A few final comment; as we continue into 2008, we expect our financial results to reflect the benefit of our continued franchise investments but also include the costs of further investment as highlighted earlier in the year. Again, these include building out our product and business line capabilities in our new markets including the de novo branches, hiring the professionals to pursue that growth, providing those professionals with the tools to achieve our growth targets and continuing to expand our wealth management business.

As you're aware every economic cycle brings its own set of challenges. This economic cycle has been marked by a challenging and volatile interest rate environment wider funding spreads, competitive pricing pressures on most loan products and a dramatic downturn in the national residential real estate markets.

On the other side of the equation are the positives we have witnessed and continue to believe will be part of our future at the bank such as; solid expansion in all of our bank markets; expansion of our wealth management businesses; a smooth integration of First Indiana into M&I; and overall reasonably well contained expense growth. Through solid organic growth and acquisitions we have made strides towards further diversifying M&I's geographical source of earnings. There is no substitute for population growth and while we are faced with some near term pain in our faster growing markets we believe these markets will serve us well in the future.

As we move forward in this challenging economic cycle, we will continue to benefit from the strength of our capital; the dedication of our employees and the diversification of the franchisee. It is this combination of all these factors that provides us with the confidence of continued future growth.

This concludes our prepared remarks. Mark and I are now ready for the question and answer portion of the call. Operator you may now open the line for questions.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question is from Tim Derby with Morgan Stanley.

Tim Derby

Great, thanks.

Gregory Smith

Hey good morning.

Tim Derby

Good morning. When you are going through your provision calculation or your reserves, how much of that is based on forward-looking estimates versus point in time, this is where we are today? The reason, I ask obviously you did a loan review or a portfolio review back in fourth quarter, you took some fairly sizable provisions and yet we are seeing another one again this quarter? And I guess, I'm trying to wonder are you looking forward in doing this or are we going to see another large provision increasing in the second quarter? Thanks.

Mark Furlong

Yeah, let me answer this. This is Mark Furlong. The review in the fourth quarter we had little over a 1.3 billion alone that we looked at. These were the projects that were greater than a million. We looked at probably 1.6 billion this quarter. The project review in the commercial side were the larger charge-offs come from -- really done project by project. And if you look at each deal, look at each one of these you look at the surrounding market; you look at the sales values and the unit sales that are occurring and that evolves over a period of time. I'd also tell you that some of this is due to the fact that as we reappraise properties, we've seen some general deterioration in most of the markets, but certainly in the Arizona and Florida markets.

So trying to estimate what that future deterioration will be is somewhat difficult. Yet we have taken these appraisals and done some discounting out of this, because we know that the difficulty in trying real accurate with those values. So I'd say to a great extent while we have been continue to expand that review we have done as what we think is good job as we can with the information we have available in trying to be forward-looking and what the (government) would be. But you know, you can't read the future.

Tim Derby

Understood. The second question I had just in terms of the share buy-back. Obviously you are off to a great start in the first quarter, I think repurchasing about 1.8% of shares outstanding. Should we expect that to moderate going forwards just given I guess the deterioration that we are seeing? Or could you end up at the high end of your 4.5% I think was targeted buy back for the year?

Gregory Smith

Yeah we are going to evaluate that on a quarter-by-quarter even a month-to-month basis can serve. It's going be a little hard for me to give a state wise guidance for right now on exactly where we expect to beyond anyone quarter, but we will evaluate it based on market conditions based on stock price certainly bringing in 1.8% or 4.8 million shares in the first quarter, we were very happy with it.

Tim Derby

Okay, great. Thank you very much.

Operator

The next question is from, Steven Alexopoulos with J.P. Morgan.

Steven Alexopoulos

Hey guys.

Gregory Smith

Hi, Steve.

Steven Alexopoulos

I was looking for just a additional commentary on the charge-offs. I was just wondering where the bulk of them were coming from whether it be loans moving to non-performer already there, or is it related to selling loans? Just where are you seeing the bulk of the charge-offs right now?

Mark Furlong

Yeah. Well 81% of the charge-offs, very similar to what we had in the first quarter, really Arizona, Florida, scored a little higher than Arizona then correspondent allow first part of it to come down, but by larger non-performers now a couple of projects that investors or developers recurring through the fourth quarter, they liked that at some point the first quarter not to carry. So of course, so some of those we really picked up there too and, but that’s coming everything instead of charge-offs in non-performing status. Some of more non-performers a year and the few have moved in the first quarter due to action developers do.

Steven Alexopoulos

What about related to loan sales?

Gregory Smith

Well, in terms of loans sales we want to be careful in terms of how much guidance we give on that, because we will evaluate future loan sale opportunities, as I mentioned in the call and want to be careful in terms of what types of indications we might show on pricing. Just like any type of relationship pricing, we would want to be careful how much of that in the public crown. So there has been some hair cut in that port folio, but I am not going to qualify it, at this point.

Steven Alexopoulos

I understood. Okay, if the current rate of net charge-offs, the reserve coverage charge-offs is by about four quarters or so, looking forward here, we better off assuming that a charge-offs go to sub 1% level near-term or should we expect to reserve increase by a bit from where it is today?

Mark Furlong

I would expect that the reserve, we continue to increase each quarter, I don’t know that were so precise at this point being able to be, did predict a charge-off. I mean there is certainly a fair amount of them is certainly in the real estate market. So I think that any answer we give would be challenged by what happened going forward. But as you know, I think this is when a period of time where reserves increase, not decrease. Thanks.

Steven Alexopoulos

Thanks guys.

Gregory Smith

Alright, thanks Steve.

Operator

Your next question is from John Arfstrom with RBC Capital Market.

John Arfstrom

Good morning guys.

Gregory Smith

Good morning.

John Arfstrom

Can you go through the (mode) non-performers loans maybe in the fourth quarter and third quarter last year?

Gregory Smith

In terms of any loan sales in the third and fourth quarter, I don’t have those numbers at my finger tips. They were not material. Certainly selling a 110 in the first quarter of this year is a much more meaningful material number then what we would have done in the past. What we have done in the past has been much more kind of one by one type of thing where there has been a motivated party on the other side.

Mark Furlong

Remember the fourth quarter as it was like 50 or 20 million, it was a much stronger number. I don’t remember the exact number, but is much smaller.

Gregory Smith

And prior to the fourth quarter it was the minimus.

John Arfstrom

The commercial construction non-performers, it looks like its little under $5 billon portfolio and the total portfolio is 5 billion, but a few non-performers loan. I am just curious if there is a common theme in the non-performing credit and how aggressively have you done your deep dive in that portfolio?

Gregory Smith

Well let me take the back half of that question first. We feel that we have done a very aggressive deep diving. We will continue too, because things in that market continue to evolve. In terms of the nature of the non-performers they come from that commercial construction book, its almost all residential related whether its condo related is really what we will really run through the commercial construction component when you think about residential. And if you think about that portfolio in terms of the geographic components of the non performers those are really going to be, in terms of our franchise concentrated on the west cost of Florida, although some of it will also come through the correspondent channel. But those are going to be the two most meaningful geographic concentration.

Mark Furlong

There is chart on the website, and chart three that gives you pretty good idea what Greg just talked to us.

John Arfstrom

Yeah, okay. And just curious on your expectations for the loan loss provision, I know it's not easy to answer, but in the last quarter we talked about 50 to 55 million and obviously this looks much higher than I had expected and Mark you alluded to that in the Q&A session. But what you guys think, you fell like you are seen a flowing inflow into the non-performers, do you fell like losses may have peeked, or is there something that’s just to difficult to predict?

Mark Furlong

I think, to some extent the ladders are true, I think its to difficult to be to accurately predict. It seems unreasonable at this point first to think that there is something like the forth quarter would repeat itself. The flow has slowed down a little bit. The real estate market continue to deteriorate and I am not telling anything and probably to read everyday in the news and certainly having the business, a pretty good size business in Arizona. That’s troublesome for a period time. I think the Florida piece is -- I don’t want to say its at a peak, but our shareholders are getting pretty close to that and we are making some progress there. It’s a much smaller portfolio though, we required and that the issues are really related to loan that originated in 2005. So that portfolio as is more limited in size as and a lot of though -- we made fair amount of progress in that portfolio and I think we will make more in second and third quarter. But the Arizona business is bigger, its been in it since late 80s and so it would just take a little more time to work through. And as you all know part is this is the real estate market, but the other part is consumer employment and employment in the United States is a pretty good so far. So what's really that factored in and what we see and different economic cycles and then employment went through a high levels. And that’s too difficult to predict that yet, at this point.

John Arfstrom

And believe it or not a non-asset quality related question. But where are you comfortable giving loan growth number at this point. Obviously, it's lower than where you have been historically, but where do you feel good about putting loans on the board?

Mark Furlong

Well, I say its frankly, obviously very selectively in Arizona and Florida and their growth has changed dramatically this year compared to prior years. But and we had a fair amount of growth in Wisconsin business, which is really kind of Northern Illinois and Wisconsin and big piece of that was CNI growth. Just underwriting the companies one by one and I think we still find some good opportunities. We've had some good business that we have picked up in our lands of Florida different from the West Cost of Florida and really each one of the market has some growth this quarter. So I would say its a lot less interest on the housing side and then slowed down dramatically. But we have found some selected commercial real estate development that were the right project in the right place with the right guarantor, position liquidity and substantial down payment and invest in their project. So we are not out of business by any sense. There has certainly been some slowing, but by enlarge the commercial portfolio is very strong and performing very well. And our customers based on the commercial side is predominantly, probably help companies there. They make decisions that are a little bit longer term than the next few quarters and they maintain higher level in liquidity because they are moving families, they are moving companies through families. So that has tended to be a pretty good portfolio for M&I really through the agent. I would say that allow then some of the harder markets, some of were not in the United States, but certainly in Arizona and Florida other than those on the housing side and we've selectively found some good opportunities in other markets and continue to take share where opportunity presents itself.

John Arfstrom

Alright. Thanks Mark.

Operator

Your next question is from Brain Foran with Goldman Sachs.

Brain Foran

Hi, can you just remind us if when we talk about the total Arizona and Florida construction exposure, is that including correspondent exposure in those states and if not how much of the correspondent portfolio is in those two states?

Gregory Smith

Well, in terms of when we looked at those portfolios and I am going to look at just the credit wise that we have given you. When we look at the construction and development project on slide 9, to the extent we have the geographic breakdown there that is actually based on where the property is. That would not have correspondent separated out differently. So it’s based on where the actual property is located.

Brain Foran

Got you. And then on the margin, I mean, if I think back to the original Metavante spin presentation, the pro-forma margin was about 20 basis points higher than the margin at the time. And I guess, I am just wondering now that we’ve gone through that, I mean, has something changed on that assumption or is it just that the margin is compressed. And what I’m ultimately trying to get out is the margin kind of flattish over the past three quarters or is it really down more than that?

Gregory Smith

Well, first of all at this point, you have seen the full impact of the Metavante separation in the margin. Just to recall, in the fourth quarter, the separation occurred on November 1st. So you would have seen the impact of the cash that we received in that separation for two months of the quarter and then this quarter, you see that incremental month impact of it.

In terms of going back to when we had our original announcement and that is why we’ve put those detailed footnotes out there, we made it clear what we were doing was, we were just backing out that level of funding at what was the then Fed fund and that’s how we got to that incremental roughly 20 basis point. Fed funds, is half of what it was back then. And so in terms of the overall dollar impact and margin impact you would see that differential.

Brain Foran

So the cash is just lot worth less to the margin you are saying.

Gregory Smith

Yeah, in fact it is. Let me go one step further though with that cash, it has been a great resource for us to have brought in an incremental cost $2.5 billion of cash in the markets that we’ve been through over the last couple of quarters. So for this past quarter, the cash was a positive impact on the margin not of the magnitude that it worked last quarters simply because its one month’s worth incrementally, but it has been a great resource for us to have.

Brain Foran

Okay. And then lastly, last quarter you guys had the kind of core EPS number or run rate at $0.58 to $0.60, I mean how should we think about that same kind of metric this quarter given the number of moving parts?

Gregory Smith

Yeah, well in terms of the way we did that last quarter, we basically took a normalization of loan loss provision and that’s how we got to that comment, as well as we had those other issues such as debt termination expense etcetera. This quarter we’ve got the VISA gain. We have that extra tax item.

In terms of suggesting what a normalized loan loss provision would be, I’m going to beg off on that a little bit at this point. We have tried to stay away from what guidance would be on that. If you wanted to take the 50 million that we had indicated before, you could back in to an incremental earnings per share.

Brain Foran

Okay. Thank you.

Operator

Your next question is from Terry McEvoy with Oppenheimer.

Gregory Smith

Hi Terry.

Terry McEvoy

Hi guys, how are you doing today?

Gregory Smith

Just fine, thanks.

Terry McEvoy

I know at the last call in January, it seemed like you were a little bit more upbeat about your Arizona business compared to your Florida business in terms of this credit trends and sound a little surprised, I guess its like six year to see the improvement in Florida where as Arizona continues to tick higher. Was that simply because a majority of the $110 million of loans that were sold in the quarter were those loans in Florida?

Gregory Smith

Certainly, we sold loans both in Florida and Arizona by roughly 75% of it was actually Florida based, 70 to 75% was Florida based. That certainly is part of it. The other dynamic is as we indicated there has been deterioration in some of the consumer or land held by individual type portfolio in Arizona, and just based on the balances of our businesses, we have more of that collateral in that type of loan in the Arizona market than we do in the Florida market.

Terry McEvoy

And just one other small question, the net investment securities gain was all of that VISA in the first quarter of ’08 or was there some other smaller items like we typically see?

Gregory Smith

In terms of this quarter, the $25.7 million that we show in the net investment securities gain is almost all VISA. There is actually, to be fair, about $1 million loss on something else that we end up going through.

Terry McEvoy

Thank you very much.

Gregory Smith

Okay. Thanks Terry.

Operator

Your next question is from Tony Davis with Stifel Nicolaus.

Tony Davis

Good afternoon guys. Just a broad followup here. I remember, I think in the fourth quarter that you would assume 10 to 25% declines I think that was arranged Greg and collateral values or property values going forward at that point. I just wanted if you could give a similar color right now on the depreciation in home prices and lot prices in Arizona, Florida that seem most likely as you look out the next six months now.

Gregory Smith

Well, in terms of the Arizona portfolio, you see it in the OFHEO report, you see it in the Case-Shiller report there has been continued deterioration in the Arizona market. What we do is just for a little background, what we do is although we look at those reports, we actually look at the trends on a zip code by zip code basis and that’s how we build our starting point for the types of trends we would see.

As you focus in Arizona and you start just generally in the Maricopa County area that continues in the Phoenix market to be relatively the more stable market and you see the depreciation factors in the Maricopa County where you can run if you are in Paradise Valley, Fountain Valley, the high-demand parts of Scottsville, after seeing some of those zip codes running flat. Some of the other areas as you get further away from those zip codes deteriorate a little bit to the point where you maybe see a 10% haircut. As you go much further outside of Phoenix, you do see haircuts that can be 40%, that’s getting much further.

Now, the one thing I want to carve out a little bit, we also, of our roughly 50 branches we have in the Arizona market, about a half dozen of those are in Tucson. The Tucson market has different price dynamics today than what you are seeing in the Phoenix market and that portion on land values et cetera seems to be doing much better. As a matter of fact, the most recent OFHEO report shows Tucson still having a little bit of price appreciation.

Tony Davis

Greg, can you talk about the degree of buyer interest that you are seeing in the stressed-asset field markets now? And is there a sufficient demand here; I know you can’t have a crystal ball of that all this, is there a sufficient demand that we might expect some accelerated exit here over the next -- for a while?

Gregory Smith

Well, in terms of just the demand dynamic and I am just going to start first with the anecdotes that we here in the market, there is a great deal of money that is being allocated to chasing assets coming out of banks. To the extent, we sold loans last quarter. I believe, with all most every property, if not every property had multiple bidders as we were taking in bids. So, there is a fair amount of money out there. How that money balances against the supply overtime, hard for me to give you any answer.

Tony Davis

Okay. And one final thing, the CNI growth was pretty impressive. How much of that is dual rate driven i.e. borrow a liquidity driven as opposed to new customers?

Gregory Smith

We are seeing a combination of increased utilization rates as well as new customers. So there is somewhat of a balance there. In terms of the $755 million of organic growth we had on the CNI side, I think it is pretty telling to actually look at where that growth has occurred. Well over half of that is really in the core Midwest markets, whether it is here in Wisconsin, whether it is in the St. Louis market place.

In terms of the types of loan growth that we are seeing in that portfolio, about a third of it is actually related to manufacturing. And recall that we have discussed it in the past, some of the dynamics that we are seeing with the capital goods manufacturers whether it is here in Wisconsin, in our St. Louis market place, in the Kansas City market place, those companies are seeing a good growth whether it is driven by the cheaper dollar and exports Wisconsin, believe it or not, exports a fair amount to China today or a little bit and this comes up as you look at some of the base book reports, little bit of import substitution in that import becomes more expensive for US companies to buy. The other areas where we are seeing some good growth are the generally wholesale trade category, as well and they are now spread around healthcare professional services type of businesses too.

Tony Davis

Thank you.

Operator

The next question comes from Heather Wolf with Merrill Lynch.

Heather Wolf

Hi there

Gregory Smith

Hay Heather.

Heather Wolf

Couple of questions for you, just a follow up to Tony's, on a property value's in Arizona, you are talking about housing prizes. I am wondering if you are appraisal are suggesting any further declined on land or partly completed projects versus what OFHEO saying for housing prizes?

Gregory Smith

Well, there is only problem using Case-Shiller or OFHEO. Case-Shiller doesn’t coverage many market OFHEO really does go at that kind of is at high points of the market and that’s why we are careful to use our own methodology where we look at a zip code by zip code factors in different parts of our market. So are we seeing further depreciation and do we bake some of that in as we look at what we expect the trends and the portfolios and the collateral types to be, you bet?

Heather Wolf

Okay. And can you give us a little bit of color on Florida as well.

Gregory Smith

Yeah. You know Florida is a little different for us. Again we don’t have so much on the consumer side, if you well tied to individuals, what we have in Florida is more tied to the condo markets that’s at least a part of that commercial construction, but that’s certainly a big part of it. We are continuing to see deterioration in the Florida market as well. I am always happy to hear the anecdotes of higher traffic and that’s certainly comes through on the Fed base book higher foot traffic looking at properties in the Florida market. But we are continuing to see deterioration. On the other hand, also we think in terms of what we have seen with Florida thus far, we have been dealing with this for a while, so we've got some of that already under our belt. And then finally, if you think about what markets we are in, in the Florida marketplace and West Coast certainly has its issues. But it seems like the dynamics on the east coast may be a little bit worse.

Heather Wolf

Okay. And can you give us some color on what's happening in your 30 to 89 day pas due bucket for the various loan categories?

Gregory Smith

Yeah, we don’t really give a light of color on the delinquencies, we do make one comment with that annually with the annual report and that’s something we had here clearance. That is clearly something we take into counts as we look at our credit trends, we look at our allowance level.

Heather Wolf

Okay. And can you give a little bit of commentary on what the rational behind moving Franklin back to performing status?

Gregory Smith

Yeah, pretty straight forward. It's performing according to the terms and we continue to do a lot of work on Franklin and are comfortable that it will continue to perform.

Heather Wolf

Okay. I was under the impression that when you renegotiated debt it had to stay on non-performing status for a certain amount of time, that’s obviously not correct?

Gregory Smith

The rule is very explicit. It has to be a non-performing status or TDR. At the end of the year on which it goes on TDR.

Heather Wolf

Got it. Okay. Okay, and if you are hearing anything from your regulators, regarding, reserve bills, migration or loss severity assumptions on construction lending?

Gregory Smith

Yeah Heather, We have continual dialogue with our regulators. We are not going to talk about our regulatory dialogs in a public forum, no. We have continual dialogues as any bankers might do.

Heather Wolf

Okay. Alright, thanks very much.

Gregory Smith

Alright. Thanks.

Operator

Your next question is from Rob Rutschow, with Deutsche Bank.

Gregory Smith

Hey Rob.

Robert Rutschow

Hey, good afternoon. The first question I have was related to the home equity opening, what assumptions do you use to come up with the LTV's for this quarter, just given that we have seen some fairly significant price declines in last couple of months?

Gregory Smith

Again, we've really gone back, we've looked at the performance on a zip code by zip code basis that’s something our team does on an ongoing basis is not something we just choose a date we do that analysis we do it on an ongoing basis.

Robert Rutschow

So are you using the OFHEO date there instead of the Case-Shiller?

Gregory Smith

No we are using our own based on what we see reported, again it’s a combination of what we see that’s actually reported a zip code by zip code basis. We look at any types of activity in that marketplace. We look at what our own experience is in that market. And if in that zip code we have certain trends that we have seen based on our own collection efforts, our own portfolio, we take that into account too. So, it's we are not dependent on OFHEO, we are not dependent on Case-Shiller, but we look at those just while we can come up with our assumptions.

Robert Rutschow

Okay. Can you tell us what the NPAs to loans are and then home equity book?

Gregory Smith

I can give you the NPLs to -- in that portfolio and that is running at 1.10.

Robert Rutschow

1.10

Gregory Smith

And it's actually down 5 basis points from year-end.

Robert Rutschow

Okay. In terms of the C&D portfolio, you gave a breakout by state, which was helpful. I was just wondering if you could give us the LTVs and some of the larger pieces, like what's the comp in Arizona and Florida?

Gregory Smith

I will be honest. In terms of having the LTVs in those portfolios, I have got a little bit, you know what, I don’t really have that at my fingertips. Particularly when you start thinking about the Wisconsin portfolio, what we have in St. Louis, what we have in Indiana, those are all still performing real well. We have looked at them at point -- we look at them regularly. I don’t have it with me, but there is nothing and particularly noteworthy on those.

Robert Rutschow

Okay. The last question would be regarding deposit competition. What aer you seeing by market and where the deposit is coming from both a geography perspective and sort of a client perspective?

Gregory Smith

Well, we are certainly seeing -- let me handle that on a business line perspective first. We are certainly seeing a decent growth as you would expect on the commercial side because what you see in the commercial side today is with the lower earnings credit rate, people are needing to make up more in terms of deposits. So we are certainly seeing good growth there. And as we noted in our commentary, we have continued to open net new DDA accounts in our community division, which -- that's a good sign of our growth and ability to build the franchise, reflects all the efforts we have had on the retail side and we have done that now for 57 months running, that's close to five year worth. In terms of deposit growth, and I am just eyeballing a couple of charts here, the areas where we are probably seeing some of the strongest growth at the moment based on different metrics, we are actually seeing some nice traction in the central state, that’s really our Kansas City market. Arizona continues to hang in there with deposits and our Minneapolis franchise continues to show good strength as they are building out their number four position in that marketplace.

Robert Rutschow

And would you expect any shift in the funding mix at all in terms of wholesale funding verus core deposits?

Gregory Smith

Well, that's what we have seen and I am just going to refer to what we saw this quarter and I am not going to necessarily say that it's going to be a trend either, but we have seen our loan to deposit ratio come down this quarter from about 132 to 127. certainly part of that is from our use of the wholesale markets, the wholesale deposit markets because those have been very cost-efficient term funding alternative and we continue to pursue our de novo branch strategies to help us build our core deposit base over time.

Robert Rutschow

Okay. Thanks

Gregory Smith

Yeah. Thank you.

Operator

Your next question is from Eric Wasserstrom with UBS.

Gregory Smith

Hey Eric.

Eric Wasserstrom

Hey, how are you?

Gregory Smith

Good. How are you doing?

Eric Wasserstrom

I am well. Thanks. Two questions please. The first just goes back to the Franklin portfolio. Do you have a sense of at this stage of what the (revisions) specifics would like there?

Gregory Smith

In terms of Franklin, I would defer to Franklin to make any comments on that type of thing. We do go through in-depth analytics with them and are comfortable where we are.

Eric Wasserstrom

So, I guess the question I am trying to get to is what reserving decision or how are the reserving decisions made with respect to that particular portfolio?

Gregory Smith

Well, we go through our typical -- there is our reserving decision as we look at our credit there is Franklin's reserving decision and that is up to Franklin to comment on; although we do go through that with them. From our perspective, when we go through our reserve build we'll look as we always do at our 114 analysis. We'll also look at our homogeneous portfolio analysis, and we'll come up with our decisions as to what the appropriate reserve is based on risk categorization of the credits.

Eric Wasserstrom

Okay. And then the other question, if you look at across the landscape, what do you think sort of the broad middle market M&I outlook is for the industry? Are shops increasingly willing to sell themselves? Is there much appetite to do that or capital level, consider decision to make that happen. Do you have a perspective on that?

Gregory Smith

Well, a couple comments. First of all, just in terms of M&I, to reiterate what we have said most recently is highly, highly unlikely that you would see us make bank acquisitions in this type of credit market. And also we'll make sure we do First Indiana correctly and make sure we have that integration and that cultural alignment ,which has gone really well, continue to building tight.

In terms of the broader landscape out there, different quarters, we get similar questions said differently. There are a number of factors out there affecting the types of companies that over time maybe we would be interested in but their risk profiles are different today. We do at different points in time get more enquiry from potential sellers, as to M&I interest level that seems to run, kind of at just a constant pace. There is always some opportunities out there of different types. But certainly, whether it's from our perspective what we would consider are bigger targets like a Gold or First Indiana, or even smaller companies that certainly seem stressed today both in the credit and as we see in the headlines, some of them from capital perspective.

Eric Wasserstrom

Thanks very much.

Gregory Smith

Sure.

Operator

Your next question is from Ken Usdin with Banc of America Securities.

Greg Smith

Hi Ken.

Ken Usdin

Hi Greg, how are you doing?

Gregory Smith

Fine

Ken Usdin

Followup on capital, Capital TC ended the quarter at 78. You did mention that, obviously you did buy some stock back in the quarter. But I was wondering, if it was a step back a little bit on capital and connect it to your comments you just made on acquisitions. You know, at the time of the M&I, the Metavante spin, you talked about running it down over time to a 6.5% level. I just wanted to know obviously with this incremental credit pressure that you are seeing, what's your just broader thoughts on the usage of excess capital. I don't need and essay or reordering of what you said in the past, but will you buy stock back and where do you think you should really sit as far as the TC ratio relative to the challenges you are seeing in the loan book?

Gregory Smith

Well, I mean, over time our target remains 6.5 with what we've see nationally in the real estate markets and with the economy more generally. Certainly, we're very happy that we're well on the high side of that. In terms of our prioritization, the prioritization to invest in our franchise remains the top priority as it was, even with Metavante was part of the bank. In terms of the acquisition component, which was number two -- well I'm going to bifurcate that. In terms of wealth management, we're still very interested in expanding the wealth management business in the right way with the right discipline in a granular manner. Banks although -- overall, it would still fit as part of that second component, second priority on capital utilization, right now, highly unlikely that we would be allocating capital to that priority. Then beyond that, certainly you have the buyback alternative as well which as we said, we are going to weigh it. But for capital to trickle down if it will in the near-term down that path of bank acquisitions as you go through that hierarchy, I think it is highly unlikely.

Ken Usdin

Okay. But you still do think as far as the buyback that its worth buying back stock amidst the uncertainty and are the IRRs, with the stock where it is, did it change the prioritization as far as the IRRs versus maybe where you would've thought they would've been a year ago?

Gregory Smith

Well a year ago, our stock was at a much higher price and the IRR it looked a little bit different than they do today. So I mean buyback looks like a attractive alternative, at the same time, we will be prudent and how we do that and this going to depend on market condition.

Ken Usdin

Again, if I could just ask a quick up question, you have the tax benefit and tax rate, but even if I adjust for that and take up the Visa gain, it still looks like the core tax rate was a little low. So can you just reconcile what the core tax rate was this quarter and also just your broader expectations for tax rate going ahead?

Gregory Smith

Yeah, in terms of the tax rate this quarter, we normalize it for that one item. Still the core tax rate this quarter came in a little later, came in about 29.8%. And there is just a couple of things I think went through, we continue to think our core-tax rate will be anywhere between 30 and 33%, as we go forward.

Ken Usdin

30 and 33% just not that wide of a range?

Gregory Smith

You know, there is lot of different things that go through at different times Ken. If you want me to say, it’s probably going to be 30-32, I could probably live with that.

Ken Usdin

Okay. Thanks Greg.

Gregory Smith

So we wind up with that 29 that we had this quarter. We wind up being just below the low end of any range that would be comfortable you modeling with.

Ken Usdin

Well, but I guess better point is that, that’s lower than you had expected. Right because you have typically had, you know, been more in the 32 to 33 land?

Gregory Smith

Yeah, but you got to keep in mind with the separation, Metavante does more business and higher tax jurisdiction than the bank does. So the tax rate is going to be a little bit lower now in comparison to what combined was a year ago.

Ken Usdin

Okay. Got it. Thanks.

Gregory Smith

Thanks.

Operator

(Operator Instruction). The next question is a follow up from Brian Foran with Goldman Sachs.

Brian Foran

I just want to clarify the 104% LTV refreshed in Arizona. Is that for the full 1.6 billion of loans?

Gregory Smith

For the vacant land portfolio or the land portfolio, because again that is all improved and entitled that would cover -- a 104 would cover the full Arizona portfolio, yes.

Brian Foran

And then do you have the (multiple speaker)

Gregory Smith

Let me just add one more thing, Maricopa county is at a 100%.

Brian Foran

Okay. And then do you have the LTV at origination so we get a sense of the change?

Gregory Smith

The LTV at origination was below 80.

Brian Foran

Okay. And then to the extent, we are dealing with loans to individuals that over a 100%. Are you seeing any evidence of the same kind of walk away problem that other banks are seeing in California and places like (Delaware) where it’s got greater than 100% LTV, home equities options arms et cetera?

Gregory Smith

We are seeing a little bit of that and we are also in those types of situation. We are using every remedy we have to continue to make sure banks covered this best, that person is able to do it.

Brian Foran

Thank you.

Operator

There are no further questions at this time. I would like to turn the conference back to Mr. Smith for any closing remarks.

Gregory Smith

Well thank you very much. We appreciate everybody’s joining us today and look forward to doing this again. Thanks.

Operator

This concluded today’s conference call. You may now disconnect.

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