By Mark Heschmeyer

June 3, 2009

The amount of troubled loans on income-producing commercial real estate property is rising rapidly at the nation’s bank and thrift institutions. The total is now more than double what it was a year ago with the bulk of the increase occuring in the first quarter of this year.

The nation’s FDIC-insured banks reported carrying $22.3 billion in nonperforming office, industrial and retail property loans on their books at the end of the first quarter and another $4.3 billion in multifamily loans. That is up from $15.7 billion and $3 billion respectively reported three months ago – increases of more than 40% in both cases.

The nation’s FDIC-insured thrifts reported carrying $2 billion in nonperforming office, industrial and retail property loans on their books at the end of the first quarter and another $842 million in multifamily loans. That is up from $1.5 billion and $591 million respectively from three months ago – increases of more than 33% and 42% respectively.

In addition to those nonperforming assets, U.S. banks were carrying $3.3 billion in foreclosed office, industrial and retail properties on their books and $1.3 billion in foreclosed apartment properties. Thrifts carried $327 million and $142 million respectively.

The FDIC (Federal Deposit Insurance Corp.) also noted that other asset-quality indicators continue to decline. Insured institutions charged off $37.8 billion in bad loans in the first quarter, almost twice the $19.6 billion of a year earlier. The amount of loans and leases that were noncurrent (90 days or more past due or in nonaccrual status) rose by $59.2 billion during the quarter, and are $154.3 billion higher than a year ago.

“Troubled loans continue to accumulate, and the costs associated with impaired assets are weighing heavily on the industry’s performance,” said FDIC Chairman Sheila C. Bair. “Nevertheless, compared to a year ago, we see some positives. Net interest income is higher, and noninterest revenue is up at larger banks, particularly trading revenues. Realized gains on securities and other assets improved, too. But these positive factors were outweighed by higher expenses for bad loans and for goodwill impairment.”

The commercial real estate numbers blighted what otherwise was a positive quarter for commercial banks and savings institutions that rebounded from losing money in the fourth quarter of last year. Banks and thrifts reported net income of $7.6 billion in the first quarter of 2009, a decline of $11.7 billion (60.8%) from the $19.3 billion that the industry earned in the first quarter of 2008.

Higher loan-loss provisions, increased goodwill write-downs, and reduced income from securitization activities all contributed to the year-over-year earnings decline. Three out of five insured institutions reported lower net income in the first quarter and one in five was unprofitable.

In fact, the FDIC’s list of problem institutions continued to grow during the quarter from 252 to 305 institutions, and the total assets of problem institutions increased from $159 billion to $220 billion.

The number of problem thrifts was 31, up from 26 in the previous quarter.

The number of FDIC-insured commercial banks and savings institutions reporting financial results declined from 8,305 to 8,246 in the first quarter. Mergers absorbed 50 institutions, while 21 insured institutions failed.

This is the largest number of failed institutions in a quarter since the fourth quarter of 1992. Thirteen new charters were added in the first quarter, the fewest since the first quarter of 1994.

“The first quarter results are telling us that the banking industry still faces tremendous challenges, and that going forward, asset quality remains a major concern,” Chairman Bair noted. “Banks are making good efforts to deal with the challenges they’re facing, but today’s report says that we’re not out of the woods yet.”

“As I see it, we’re now in the cleanup phase for the banking industry,” Bair added. “It will take some more time. But in the end, we’ll have a stronger banking industry that’s better able to meet the demand for credit as the economy recovers.”

Insured institutions set aside $60.9 billion in provisions for loan losses in the first quarter, an increase of $23.7 billion (63.6%) over the first quarter of 2008.

The U.S. thrift industry rebounded too in the first quarter of 2009, but still reported losses of $47 million. That is still their best performance since September 2007, the Office of Thrift Supervision (OTS) reported.

“We are seeing encouraging signs in the performance of the thrift industry,” said Acting Director John E. Bowman. “Although it’s too early to say we’ve hit bottom or that the industry’s troubles are behind us, fundamentals such as solid capital, strong levels of loan loss reserves and improving operating income give the industry a solid platform for the future.”

During the quarter, 74% of thrifts were profitable, up from 65% in the fourth quarter of 2008. The improved profitability reflected lower loan-loss provisions of $5.8 billion in the quarter, down from $9.3 billion in the previous quarter. Although loan loss provisions declined, they remained elevated and were the fifth highest on record.

May 11, 2009, 3:26 p.m. EST

Forward-Looking Information

This Quarterly Report on Form 10-Q contains certain forward-looking information about the Company and its subsidiaries, which statements are intended to be covered by the safe harbor for “forward-looking statements” provided by the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact are forward-looking statements. Such statements involve inherent risks and uncertainties, many of which are difficult to predict and are generally beyond the control of the Company. We caution readers that a number of important factors could cause actual results to differ materially from those expressed in, implied or projected by, such forward-looking statements. Risks and uncertainties include, but are not limited to:

If any of these risks or uncertainties materializes, or if any of the assumptions underlying such forward-looking statements proves to be incorrect, our results could differ materially from those expressed in, implied or projected by, such forward-looking statements. The Company assumes no obligation to update such forward-looking statements.

Table of Contents

Overview

We are a bank holding company registered under the Bank Holding Company Act of 1956, as amended. Our principal business is to serve as the holding company for our subsidiary bank, Pacific Western Bank, which we refer to as Pacific Western or the Bank.

Pacific Western is a full-service community bank offering a broad range of banking products and services including: accepting time and demand deposits; originating loans, including commercial, real estate construction, SBA-guaranteed, consumer, and international loans; and providing other business-oriented products. Our operations are primarily located in Southern California and the Bank focuses on conducting business with small to medium-sized businesses and the owners and employees of those businesses in our marketplace. Through our asset-based lending operation we also operate in Arizona, Northern California, the Pacific Northwest, and Texas. At March 31, 2009, our assets totaled $4.5 billion, of which gross loans totaled $3.9 billion. At this date approximately 21% were commercial loans, 57% were commercial real estate loans, 9% were commercial real estate construction loans, 6% were residential real estate construction loans, 6% were residential real estate loans, and 1% were consumer and other loans. These percentages include some foreign loans, primarily to individuals or entities with business in Mexico, representing 1% of total loans. Our portfolio’s value and credit quality is affected in large part by real estate trends in Southern California, which have been negative over the last 18 months.

Pacific Western competes actively for deposits, and emphasizes solicitation of noninterest-bearing deposits. In managing the top line of our business, we focus on loan growth and loan yield, deposit cost, and net interest margin, as net interest income, on a year-to-date basis, accounts for 89% of our net revenues (net interest income plus noninterest income).

Key Performance Indicators

Among other factors, our operating results depend generally on the following:

The Level of Our Net Interest Income

Net interest income is the excess of interest earned on our interest-earning assets over the interest paid on our interest-bearing liabilities. The decline in market interest rates over the last 18 months and fierce competition for deposits has compressed our net interest margin. Based on our balance sheet structure the yield on our earning assets decreased more rapidly and significantly than the cost of our funding sources during 2008 and into 2009. A sustained low interest rate environment combined with tight marketplace liquidity and low loan growth may further reduce both our net interest income and net interest margin going forward.

Our primary interest-earning asset is loans. Our primary interest-bearing liabilities include deposits, borrowings, and subordinated debentures. We attempt to increase our net interest income by maintaining a high loan-to-deposit ratio and a high level of noninterest-bearing deposits. While our deposit balances will fluctuate depending on deposit holders’ perceptions of alternative yields available in the market, we attempt to minimize these variances by attracting a high percentage of noninterest-bearing deposits, which have no expectation of yield. At March 31, 2009, approximately 36% of our total deposits were noninterest-bearing deposits.

The recent disruptions in the financial credit and liquidity markets have resulted in increased competition from financial institutions seeking to maintain liquidity and this has impacted deposit flows and the rates paid on certain deposit accounts. In addition to deposits, we have borrowing capacity under various credit lines which we use for liquidity needs such as funding loan demand, managing deposit flows and interim acquisition financing. This borrowing capacity is relatively flexible and has

Table of Contents

become one of the least expensive sources of funds. However, our borrowing lines are considered a secondary source of liquidity as we serve our local markets and customers with our deposit products.

Loan Growth

We generally seek new lending opportunities in the $500,000 to $10 million range, try to limit loan maturities for commercial loans to one year, for construction loans up to 18 months, and for commercial real estate loans up to ten years, and to price lending products so as to preserve our interest spread and net interest margin. We sometimes encounter strong competition in pursuing lending opportunities such that potential borrowers obtain loans elsewhere at lower rates than those we offer. We have continued to reduce our exposure to residential construction and foreign loans, including limiting the amount of new loans in these categories. Our ability to make new loans is dependent on economic factors in our market area, borrower qualifications, competition, and liquidity, among other items. We expect loan growth for 2009 to be negatively affected by the current state of the economy in Southern California and the competition among banks for liquidity. Although loans, net of unearned income, declined $63.6 million during the first quarter of 2009, new loans and advances on loan commitments totaled $237 million.

The Magnitude of Credit Losses

We stress credit quality in originating and monitoring the loans we make and measure our success by the levels of our nonperforming assets, net charge-offs and allowance for credit losses. Our allowance for credit losses is the sum of our allowance for loan losses and our reserve for unfunded loan commitments. Provisions for credit losses are charged to operations as and when needed for both on and off balance sheet credit exposure. Loans which are deemed uncollectible are charged off and deducted from the allowance for loan losses. Recoveries on loans previously charged off are added to the allowance for loan losses. During the three months ended March 31, 2009, we made a provision for credit losses totaling $14.0 million based upon our reserve methodology. We considered, among other factors, the level of net charge-offs, the level and trends of classified, criticized, and nonaccrual loans, usage trends of unfunded loan commitments, general market conditions, and portfolio concentrations.

We continually review our loans to determine whether there has been any deterioration in credit quality stemming from economic conditions or other factors which may affect collectibility of our loans. Changes in economic conditions, such as inflation, unemployment, consumer spending, increases in the general level of interest rates and negative conditions in borrowers’ businesses could negatively impact our customers and cause us to adversely classify loans and increase portfolio loss factors. An increase in classified loans generally results in increased provisions for credit losses. Any deterioration in the real estate market may lead to increased provisions for credit losses because of our concentration in real estate loans.

http://www.marketwatch.com

May 1 (Bloomberg) — The Federal Reserve authorized longer- term loans for investors buying securities backed by commercial mortgages in a $1 trillion emergency credit program, taking a step the industry said was needed to avert defaults.

Beginning in June, the Fed will offer five-year loans at higher interest rates than the three-year loans previously approved for the Term Asset-Backed Securities Loan Facility, the central bank said today in a statement from Washington. The Fed will also accept securities backed by loans designed to help small businesses buy insurance.

While policy makers had been wary of financing longer-term loans out of concern it would be harder to raise interest rates when the economy recovers, leaving TALF unchanged may have resulted in tighter credit. Sales of commercial mortgage-backed securities slumped to $12.2 billion last year from a record $237 billion in 2007, according to JPMorgan Chase & Co. estimates.

Adding CMBS to the TALF “will help prevent defaults on economically viable commercial properties, increase the capacity of current holders of maturing mortgages to make additional loans and facilitate the sale of distressed properties,” the Fed said today.

$100 Billion

The Fed set an initial limit on the total amount of five- year TALF loans at $100 billion and “will continue to evaluate that limit.” Terms apply to CMBS issued in 2009, backed by loans originated since July 1, 2008, and carrying the highest credit rating. The Fed is separately still developing terms of a so-called legacy TALF to finance purchases of older securities.

Yield premiums on commercial-mortgage bonds compared with benchmark securities rose after the announcement, as some investors were expecting the Fed to also detail plans for older securities, according to Lisa Pendergast, an analyst at RBS Securities Inc. in Greenwich, Connecticut.

“There’s no one on the Street doing new loans,” limiting the impact of the Fed’s initiative until the legacy assets are addressed, she said.

The extra yield over benchmark rates on the most-senior class of a 2007 Goldman Sachs Group Inc. commercial-mortgage bond climbed about 1 percentage point to about 8.5 percentage points today, according to RBS. The yield gap had fallen from 12.6 percentage points when regulators in late March detailed plans to finance purchases of older, distressed assets.

‘Step at a Time’

“While it’s a great step in the right direction, it doesn’t have the impact on older securities that we would like,” said Christopher Hoeffel, president of the Commercial Mortgage Securities Association, a trade group, in New York. “They have not shut the door on a five-year term for legacy assets, but they are taking this one step at a time.”

New loans for CMBS will be more expensive based on today’s interest rates. If the Fed set TALF rates today, an investor could borrow for five years at 3.63 percent or three years at 2.97 percent, according to calculations by Bloomberg.

Five-year loans will be available for purchases of CMBS as well as securities backed by education and small-business debt, the Fed said. Investors haven’t requested loans for those securities through the TALF yet.

“Three-year funding wasn’t long enough” to aid the market, said John Ryding, chief economist at RDQ Economics LLC in New York, who formerly worked at the Fed. “It’s another piece of the Fed’s balance sheet that’s going to be locked in place for a really long time,” he also said.

TALF loans are backed by Treasury Department funds from the Troubled Asset Relief Program, helping protect the Fed against the first 10 percent of losses.

Bigger ‘Haircuts’

Investors, such as hedge funds, will need to put up $15 of their own capital for every $100 in CMBS that will be posted as collateral to the Fed. That’s one of the steepest “haircuts” in the TALF, indicating Fed officials see CMBS among the riskiest assets. For subprime credit-card ABS with a five-year “average life,” investors put up $10 for every $100 in securities.

The first investor subscription date for CMBS loans through the TALF will be in late June, followed by the “latter part of each month,” the Fed said. The subscription date for other assets, such as auto-loan and credit-card securities, will remain at the beginning of each month. The Fed authorized the TALF through December.

May 5 is the deadline for the third monthly round of applications for other TALF loans. General Electric Co., Harley- Davidson Inc., Volkswagen AG and Honda Motor Co. lead companies selling debt for next week’s round, according to people familiar with the sales.

To contact the reporter on this story: Scott Lanman in Washington at slanman@bloomberg.net.

By Mark Heschmeyer

May 13, 2009

If the current economic malaise brings down any of the largest banks in the country, commercial real estate likely WON’T be the culprit. Office, industrial and retail properties specifically are even less likely to bring down the nation’s top banks.

The 19 largest U.S. banks, which account for 70% of the bank holdings of this country, were the focus of the U.S. Federal Reserve ‘stress tests’ results released this past week. Under the worst case scenarios envisioned for the current recession, commercial real estate losses would cost those banks $53 billion in losses this year and next.

While that is a lot of money, it still pales in comparison with residential loan losses, which still would make up the bulk of the projected losses, $185.5 billion. In fact, exposure to commercial real estate loans falls way down the line in terms of producing projected losses for banks. Trading and counterparty investments would lose $99 billion; consumer loans $83.7 billion; credit card loans $82.4 billion; business loans, $60.1 billion; only then comes commercial real estate.

The two-year loss estimates totaled about $600 billion in the more adverse scenario for the 19 bank holding companies.

Estimated losses on residential mortgages are substantial over the two-year scenario, consistent with the sharp drop in residential house prices in the past two years and their projected continued steep fall in the more adverse scenario. The effects of reduced home prices on household wealth and the indirect effects through reduced economic activity, also push up estimated losses on consumer credit, including losses on credit cards and on other consumer loans. Together, residential mortgages and consumer loans (including credit card and other consumer loans) account for $322 billion, or 70% of the loan losses projected under the more adverse scenario.

Even in terms of percentages of losses, commercial real estate loans hold up better on the banks’ books than its other assets and investments. About 22.5% each of residential real estate loans and credit card loans would go bad but only 8.5% of commercial real estate loans would go bad.

To cover those potential losses, the Federal Reserve has asked the 19 banks to raise $75 billion in additional common equity by next November.

“This was a carefully designed, credible test,” said U.S. Treasury Secretary Tim Geithner. “Banks supervisors applied a historically high set of loss estimates on securities and loans, as well as a conservative view towards potential earnings that could act as a buffer against those losses.”

“These are estimate of potential losses and earnings that could occur in the event of a more severe recession. They are not a prediction of where the economy is headed,” Geithner added. “The results are less acute than some had expected, in part because concern about the risk of a more severe recession have diminished, market have improved, and banks, in anticipation of the release of the stress test, have acted in the last few months to increased capital.”

The stress test process involved the projection of losses on loans and investment assets, as well as the firms’ capacity to absorb losses. To analyze commercial real estate loans, the bank holding companies were asked to submit detailed portfolio information on property type, loan to value (LTV) ratios, debt service coverage ratios (DSCR), geography, and loan maturities.

Loss rates on commercial real estate loans reflected realized and projected substantial declines in real estate values. However, federal supervisors analyzed loans for construction (both residential and construction) and land development, multifamily property, and non-farm non-residential projects separately. And the bulk of the projected losses in the commercial real estate come from the construction and land development loans. Income producing properties fared much better.

The stress tests projected a baseline loss of 9% to 12% for construction loans and a worse case scenario of 15% to 18%; multifamily losses had a projected baseline loss of 3.5% to 6.5% and a worse case loss of 10% to 11%; office, industrial and retail properties had a projected baseline loss of 4% to 5% and worse case loss of 7% to 9%.

The results of the stress tests “were good news and were generally received as such, although it is important not to take excessive comfort from what remains essentially a highly educated guess as to the future of the banks in a very uncertain environment,” concluded Douglas J. Elliott , a fellow in economic studies at The Brookings Institution. “The test appears to be somewhat tougher than the base case of the International Monetary Fund, but not nearly as harsh as the most pessimistic analyses.”

“This implies that while we may well have turned the corner, we can be far from certain that the solvency crisis in banking is over,” Elliott wrote in a paper this week. “Even if it is, the stubborn credit crunch will last for considerably longer. The banks will be in a better position to lend more freely as a result of the modest influx of new capital and the greater benefit of the confidence boost from passing the tests. However, the depth of this recession and the shattering of the securitization market will keep credit tight for some time.”

One unintended side effect of the results of the stress test, Elliott said is that they will work against the government’s plan to encourage investors to buy toxic assets from the banks.

“The government’s reassurance that these banks have, or will soon have, the capital to handle even the stress scenario without selling their toxic assets makes it harder for the regulators to pressure the banks to actually sell,” Elliott concluded. “This matters because the banks generally believe that even with government incentives the private investors are looking to pay unreasonably low prices for these assets.”

The banks would generally prefer to hold onto the assets until they can get a better price, Elliott reasoned.

Generally across the board, the 19 bank holding companies put to the stress tests, said they believe the stress test assumptions were unreasonably conservative and actual losses will be far less than projected.

Regions Financial Corp. in Birmingham, AL, questioned whether it should be required to raise additional capital now to provide for a two-year adverse economic scenario, particularly in view of the fact that Federal Reserve Chairman Ben Bernanke this past week said that he expects the economy to begin recovering during 2009.

Regions said it believes that the stress test results do not accurately reflect the loan losses that Regions is likely to experience even in the “more adverse” economic scenario. In particular, the anticipated two-year cumulative loss ratio of 13.7% projected on its commercial real estate is sharply higher than Regions’ actual annualized loss ratio on its portfolio in the first quarter and sharply higher than that projected for the other banking companies.

Bank of America Corp. in Charlotte, NC, was projected to have a 2-year loss rate on its commercial real estate loans of 7.4%, or 3.7% per year. Bank of America said its actual first quarter annualized loss rate on the equivalent portfolio was 1.68%. So, loss rates would have to more than double to 3.9% and remain there for the remaining seven quarters to reach the FRB’s projections.

Additionally, the FRB’s loss rate is well above the combined commercial and commercial real estate peak loss rate experienced by Bank of America in either the 1991 recession or the 2002 recession.

Individual CRE Stress Test Results

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·   Analysis by: Robert Canter

·   Analysis of: Opus South Files Chapter 11

·   Published at: www.globest.com

Implications

The fact that a well respected usually conservative developer has filed for Chapter 11 protection under the Bankruptcy Code is another chilling example of just how far and deep this economic downturn has affected every corner of the commercial real estate sector.  

Analysis

 What is surprising about Opus South’s filing for bankruptcy isn’t so much that a commercial developer has gone under, it’s the fact that a Company such as Opus has fallen victim to this particular downturn. What this Opus entity did was surprising given their usually conservative business practices.  

What got Opus South in trouble, as pointed out in the subject article, was get involved in residential development in FLORIDA. Why any developer would ever touch the Florida residential market has always been a mystery to this writer. Florida residential development has always been a high risk venture. There is always some new development coming onto the market which offers more or updated amenities. It’s no secret that markets such as Florida, California, Arizona, and Nevada are retirement havens as well as attractions due to the great weather these States offer. There has certainly been large amounts of migration to these areas. That being said, Florida for example has for the past 35-40 years been a boom or bust market for developers.  

One of the main culprits of this particular housing market disaster were the vast number of speculators buying to flip properties. Savvy developers should have known this fact, as should have the Federal Reserve and most lenders.  

The reason speculators caused such a problem is they helped create a false sense of buyer demand. If a good one-third of the new housing stock was being bought by speculators, the demand side or supply side will appear one-third stronger than reality. Adding to Opus South’s troubles is they can not obtain re-financing on existing commercial projects.  

How a predominately commercial developer such as Opus South allowed themselves to get caught up in this mess says more about the weakness of Companies to resist the temptation of short term profits than looking at their long term health.  

This writer would bet this is just the beginning of a trend within the commercial sector, as loans mature, and property values decline, and cash flows decrease, its inevitable that some of the largest and most prominent commercial real estate names will be going under for the very same reasons Opus South has.  

Some people are still holding out hope that the economy is starting to wake up. That may be, but as anyone involved in commercial real estate will tell you, this sector of the economy is just now beginning to crumble, and there will be a wave of failures, bankruptcies, foreclosures and so forth to come. Adding to the misery is the constant downward spiral of unemployment numbers. This portends further bad news for almost every commercial sector. This includes office properties, as corporations shed their overhead, vacancy rates will be going much higher. Retail some think has reached close to bottom. This writer disagrees, as the state of consumerism is going through a new paradigm shift. Buying habits will be changed for the long run, even if the economy makes a come back of sorts.  

What I don’t think analysts take into account, is the psychology of human nature. In addition, Americans are more concerned with debt reduction than buying a new anything, unless absolutely necessary. Add to this that many people’s credit limits have been reduced which will help suppress buying.  

As we have been shown by numerous data providers, the gains of the last 4 years have been given back and then some. So I trust the lessons learned once again will not be revisited…but that is not Human Nature.

Bear Sterns Cos. was in the news again Thursday, in case anyone remembers back far enough to recall the last time it was big news–a time when the disappearance of that company into JPMorgan Chase seemed unfortunate, but not necessarily a harbinger of vast financial problems ahead. Which, in fact, it turned out to be.

Now the Federal Reserve has released something of an autopsy for the company, detailing the kinds of assets it accepted from Bear Stearns (the ones JPMorgan didn’t want) and which of them caused losses for the Fed since then.

The biggest losses in the former Bear Stearns portfolio, as of year-end 2008? Real estate. As of the end of last year, the central bank had written down the value of the former Bear Stearns commercial mortgage holdings to $5.6 billion, or down about 28 percent. The value of the former Bear Stearns residential mortgage holdings was written down 38 percent, to $937 million.

The latest monthly Moody’s/REAL National All Property Type Aggregate Index was also released on Thursday, indicating that the total value of U.S. commercial properties has retreated to where they were in March 2005. The index measures commercial valuation by surveying changes in sale prices, just as the Standard & Poors Case-Schiller Home Price index does for residential properties.

The latest Case-Schiller index put U.S. residential values back at October 2003, incidentally. Optimistic analysts say that means a bottom is near for housing; their more pessimistic colleagues say, are you kidding? No bottom yet.

In any case, the National Association of Realtors reported that existing house sales dropped 3 percent in March when compared with February, to a seasonally adjusted annual rate of 4.57 million units, and down 7.1 percent when compared with March 2008. The median price of houses that sold during March was $175,200, which was actually an uptick from February, when the median was $168,200. Compared with March 2008, however, the median price in March 2009 was down about 12 percent.

Under the radar screen, which seems to show little but bad news these days, some fairly large commercial property leasing deals are still getting done. For instance, Sanyo Logistics Corp., a logistics services provider and business unit of Sanyo Electric Co., inked a lease this week with landlord ProLogis for 215,000 square feet of recently completed distribution space in southwest suburban Romeoville, Ill., near Chicago. This followed a similarly sized deal in Japan between the two companies last month.

If anything, such deals show that real estate–always a game of relationships–is even more relationship-oriented in the depths of the recession. The Chicago lease is the seventh one between the two companies, and Sanyo now leases roughly 2 million square feet in ProLogis distribution facilities in Southern California, metro Chicago and various locations throughout Japan.

“Customer relationships are the backbone of our operations and have always been important,” Doug Kiersey, senior vice president & Midwest regional director at ProLogis, told CPN. “But they’re even more critical in this economic environment.”

Wall Street had a zig-zag sort of day on Thursday, but the major indices eventually edged upward. The Dow Jones Industrial Average was up 70.49 points, or 0.89 percent, while the S&P 500 was up 0.99 percent and the Nasdaq up 0.37 percent.

More Business & Investing News… March 18 (Reuters) – RBC Capital Markets downgraded Zions Bancorp (ZION.O), a large U.S. regional bank, to “sector perform” from “outperform,” citing continued deterioration of credit across all portfolios and geographies.

“Ongoing weakness in the residential construction portfolio and securities impairments have continued to weigh on its profitability and weakened the capital base,” analyst Joe Morford said in a note.

However, more concerning is that the problems are increasingly spreading beyond just residential construction in the Southwest, Morford added.

Commercial & Industrial loan segment is deteriorating in all markets, and commercial real estate loan is also showing more stress, Morford said.

“Beyond just Nevada, Arizona, and California, Zions is seeing downgrades on the rise in Utah, Colorado, and now even Texas. As such, reserve building this year is likely to be more than the 20-40 basis points originally anticipated,” Morford added.

Morford, who cut his price target on the stock to $12 from $16, also expects Zions to see contraction in loan balances on weaker demand in the near term and sees expenses trending higher partly due to increased workout costs. (Reporting by Archana Shankar in Bangalore; Editing by Himani Sarkar)

(1888 PressRelease) March 17, 2009 – The weakening U.S. dollar and declining home values are largely discouraging for American homeowners. For international real estate investors, however, such conditions present opportunity. Foreclosure Specialist and Trainer, Thomas Tsilionis recently released the 2009 TSI REPORT to 85,000 members of The Association of Commercial Real Estate Professionals (ACREPRO). The TSI Report is generated March 1 and September 1 each year and includes a section that relates to International Home Buying Activity.

“TSI estimates that between 150,000 and 190,000 homes were sold to foreign nationals from February 2008 and February 2009 ,” according to the TSI press release on the findings. “Recent foreign buyers purchased properties in every state and the District of Columbia. The most popular states where international buyers purchased homes are Florida, California and Texas. Arizona, New York, Washington and Nevada were also popular.”

Nearly half of the properties purchased by foreign buyers were located in the South; 25.4 percent of all property sales to foreign buyers occurred in Florida alone. (For more information on foreign investment in Florida’s real estate market, please see our previous article, Florida is the new Europe.)

More than 25 percent of the estimated 150,000 to 190,000 sales to foreign buyers were in Florida “Foreign exchange rates have helped make U.S. homes more affordable for international buyers,” according to TSI’s press release. “The euro, for example, has strengthened 24 percent versus the U.S. dollar over the past two years. Home prices are also now more affordable in places such as Florida and Arizona, contributing to those states’ popularity among foreign buyers.”

The typical foreign buyer bought a single-family home at $297,400, intended for use as a vacation home, where the buyer stayed 2.6 months of the year, according to the findings. 40 percent of foreign buyers made the purchase in cash, compared to just 7 percent of domestic homebuyers who do so. In the previous report, which covered the period between April 2006 and April 2008, 28 percent of foreign buyers made their purchases in cash. This 12 percent increase in foreign buyers who purchased properties in cash can perhaps be attributed to the weakened U.S. dollar and sinking home prices across the country.

Foreigners who invest in U.S. real estate also differ from their domestic counterparts in other ways. They tend to buy more expensive properties than domestic real estate investors, and are more likely to purchase a condo or townhome than domestic real estate investors. Foreign buyers purchase properties that cost an average of 36 percent more than domestic buyers, and 14 percent of properties purchased by foreigners cost $750,000 or more, according to the findings.

Investors from China were the most likely to purchase properties at $1 million and more, with 14 percent of Chinese buyers doing so. The median price paid by real estate investors from China was $450,000, the highest median of any location in the report.

Nearly one quarter of investors from India purchased properties to use as rentals, the highest found in the report.

“People from North America, Europe and Asia accounted for more than 85 percent of recent foreign home buying transactions. The top six countries of origin for foreign home buyers, in rank order, were Canada, the United Kingdom, Mexico, China, India and Germany,” according to TSI’s press release. “This year, Canada replaced Mexico as the country with the largest share of foreign buyers in the U.S. The percentage of Canadian buyers doubled from last year, from 11 percent to 23.5 percent.”

26 percent of Realtors have worked with foreign homebuyers, according to Inman News; that is down slightly from the 32 percent of respondents in TSI’s previous report, which covered the period between April 2006 and April 2008. The drop February be attributed in part to decreased confidence in the U.S. real estate market in the wake of its downturn.

The research included in the study covers the period between February 2008 and February 2009 and was based on responses from about 4,000 Realtors who work with international real estate investors. Such foreign buyers were defined as those who aren’t classified as foreign-born residents of the U.S., and who principally reside out of the U.S.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

For the year ended December 31, 2008, the Corporation reported a net loss of $2,043.5 million or $7.92 per diluted common share compared to income from continuing operations for the year ended December 31, 2007 of $496.9 million or $1.87 per diluted common share.

Organic loan growth, disciplined deposit pricing, the ability to access reasonably priced funding sources and banking acquisitions completed in 2008 and 2007 contributed to the growth in net interest income and other banking sources of revenues. Despite the volatile markets, the Corporation’s Wealth Management segment continued to report growth in fee income.

The deterioration in the national real estate markets, economic recession and disruption in the capital markets adversely impacted the Corporation’s financial condition and results of operations throughout 2008.

As a result of the unprecedented weakness in the financial markets and the decline in the Corporation’s common stock price, numerous tests for goodwill impairment were performed throughout 2008. The results of goodwill impairment testing at the end of the fourth quarter of 2008 indicated that the fair value of certain of the Corporation’s banking-related Reporting Units were less than their book values, resulting in a non-cash after-tax charge to earnings for goodwill impairment in the amount of $1,487.9 million or $5.73 per diluted common share. The Tier 1 and Total regulatory capital ratios were unaffected by this adjustment. See Note 15-Shareholders’ Equity in Notes to Consolidated Financial Statements for additional information.

The continued deterioration in the national real estate markets and the economic recession had a negative impact on the Corporation’s loan and lease portfolio in 2008. In addition to a significant increase in nonperforming assets, the amount of loan impairment increased in 2008 due to the depressed state of underlying real estate collateral values. The Corporation’s construction and development real estate loans, particularly in Arizona, the west coast of Florida and certain correspondent banking business channels, exhibited the most dramatic increase in stress and impairment. The increase in stress and impairment and the accelerated disposition of problem assets resulted in net charge-offs and provision for loan and lease losses that were significantly higher in 2008 when compared to the Corporation’s historical experience with net charge-offs and provision for loan and lease losses. The provision for loan and lease losses amounted to $2,037.7 million in 2008 compared to $319.8 million in 2007, an increase of $1,717.9 million. On an after-tax basis, the increase in the provision for loan and lease losses in 2008 compared to 2007 amounted to approximately $1,099.5 million or $4.24 per diluted common share.

Throughout 2008, the Corporation experienced elevated levels of expenses due to the increase in operating costs associated with collection efforts and carrying nonperforming assets. The Corporation estimates that the increase in expense associated with collection efforts and carrying nonperforming assets, net of related revenue, amounted to $85.5 million in 2008 compared to 2007, which, on an after-tax basis, was approximately $0.21 per diluted common share.

The economic recession and disruption in the capital markets also resulted in an other than temporary investment security loss, write-down of a bank-owned life insurance policy, unexpected losses in the Corporation’s Wealth Management segment and other credit and market related losses. Those write-downs and losses were partially offset by gains from the extinguishment of certain debt obligations, securities gains and reversals of litigation accruals associated with the Corporation’s membership interests in Visa and an additional income tax benefit related to prior years. During the fourth quarter of 2008, the Corporation recorded severance expense associated with a corporate-wide reduction in force. For the year ended December 31, 2008, these items resulted in a net pre-tax loss of $29.3 million which on an after-tax basis amounted to approximately $0.05 per diluted common share.

As previously announced, the Corporation is a participant in the United States Department of the Treasury’s (“UST”) Capital Purchase Program (the “CPP”). During the fourth quarter of 2008, the Corporation issued to the government $1.7 billion of senior perpetual preferred stock and a warrant to purchase the Corporation’s common stock. At December 31, 2008, the Corporation’s Tier 1 ratio was 9.49 percent, $2.0 billion above the “well capitalized” threshold as defined by regulatory standards.

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According to the American Bankers Association Economic Advisory Committee, the United States economy declined at the sharpest rate in nearly three decades during the fourth quarter of 2008. In light of the economic recession and expectation that 2009 will continue to be a difficult year for the global economy and the real estate markets in particular, the Corporation is committed to preserving its strong capital base while contributing to the objective of the CPP by continuing to lend to creditworthy consumers and businesses and continuing to provide assistance to customers who are increasingly challenged by the economy.

In order to preserve its strong capital base, the Corporation recently announced that it would undertake a series of significant expense reduction initiatives, reduce the quarterly common stock cash dividend to $0.01 per share and implement several risk-management strategies to reduce its exposure to construction and development loans.

Through a freeze on filling open positions, attrition and staff reductions, the Corporation will reduce its workforce by approximately 830 positions or approximately 8% of its total workforce. Approximately 80 percent of the workforce reductions were completed in 2008. The remaining 20 percent are related to operational efficiencies and are expected to be achieved by the end of 2009. Executive officer and other senior level salaries will be frozen in 2009 and awards and benefits under a variety of other programs for employees will be reduced. However, the Corporation’s ability to use performance-based compensation elements will be severely limited under the American Recovery and Reinvestment Act of 2009 (the “ARRA”) regulations. As a result, the Human Resources and Compensation Committee of the Board of Directors will evaluate what actions to take in response to these regulations, including a potential reversal of the freeze on base salary increases. The Board of Directors also reduced the annual cash retainer for directors by 25%, and the Corporation is reducing a number of other expenses. These expense initiatives are expected to reduce the Corporation’s expenses on an annualized, pre-tax basis by approximately $100 million.

With respect to credit quality, management expects the prevailing economic and national real estate market conditions will continue in 2009 and could extend into 2010. The level of net charge-offs and the recorded allowance for loan and lease losses are based on management’s best estimate of the losses incurred at the measurement date. Management recognizes there are significant estimates in the process and the ultimate losses could be significantly different from those currently estimated. Management expects the provision for loan and lease losses will continue to be higher than its pre-2007 historical experience prior to the recession and crisis in the national real estate markets. Rapidly changing collateral values, general economic conditions and numerous other factors continue to create volatility in the housing markets and have increased the possibility that additional losses may have to be recognized with respect to the Corporation’s current nonperforming assets. In addition, further deterioration in the economy and national housing markets would likely result in an increase in the amount of nonperforming assets, net charge-offs and provisions for loan and lease losses reported in future quarters. Due to the uncertainty caused by the recession and the resulting rise in unemployment, the crisis in the national real estate markets and numerous other unknown factors that will ultimately affect the timing and amount of nonperforming assets, net charge-offs and the provision for loan and lease losses, it is difficult to develop reliable expectations about nonperforming assets, net charge-offs and provisions for loan and lease losses that will be recognized in 2009.

With regard to other expectations for 2009, management expects the net interest margin will continue to experience compression based on current interest rate volatility occurring in the market together with the numerous other factors that impact net interest income and the net interest margin. Commercial and industrial loans contracted slightly in the fourth quarter of 2008 compared to the third quarter of 2008. Commercial and industrial loan growth is expected to be in the low single-digits in 2009. Commercial real estate loan growth for 2009 is expected to be relatively modest and consistent with the 1.9% linked quarter loan growth the Corporation experienced in the fourth quarter of 2008. Management expects construction and development real estate loans will continue to decline. Wealth Management revenue is affected by market volatility and direction. The uncertainty that currently exists in the markets makes it difficult to make an estimate of Wealth Management revenue in 2009.

Income from continuing operations in 2007 amounted to $496.9 million or $1.87 per diluted common share compared to income from continuing operations in 2006 of $647.7 million or $2.54 per diluted common share, a decrease of $150.8 million or $0.67 per diluted common share. The decrease in income from continuing operations in 2007 compared to 2006 was primarily attributable to the increases in the provision for loan and lease losses. The provision for loan and lease losses amounted to $319.8 million in 2007 compared to $50.6 million in 2006, an increase of $269.2 million. On an after-tax basis, the increase in the provision for loan and lease losses in 2007 compared to 2006 amounted to approximately $175.0 million or $0.66 per diluted common share.

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Organic loan and bank-issued deposit growth, the two banking acquisitions completed in 2007 and a full year of the two banking acquisitions completed in 2006 contributed to the growth in net interest income and other banking sources of revenues. Continued growth in assets under management and assets under administration and acquisitions resulted in solid growth in fee income for Wealth Management. Increased investment securities gains and gains from branch sales were somewhat offset by lower mortgage banking revenue in 2007.

Expenses in 2007 include losses associated with two debt terminations, litigation accruals that arose from the Corporation’s membership interests in Visa and a donation to support charitable works in the communities within the Corporation’s markets. In the aggregate, these expense and loss items amounted to approximately $134.5 million and resulted in a decrease to income from continuing operations of $87.4 million or $0.32 per diluted common share.

On November 1, 2007, old Marshall & Ilsley Corporation, the Accounting Predecessor to new Marshall & Ilsley Corporation (which is referred to as “M&I” or the “Corporation”) and its wholly owned subsidiary, Metavante Corporation, the Accounting Predecessor to Metavante Technologies, Inc., (which is referred to as “Metavante”), became two separate publicly traded companies. The Corporation refers to this transaction as the “Separation.”

As part of the Separation, the Corporation received capital contributions of $1,665 million in cash from Metavante, which consisted of a contribution from Metavante of $1,040 million and proceeds of $625 million from Metavante’s issuance of a 25% equity interest to WPM L.P., an affiliate of Warburg Pincus

The results of operations and financial condition for the periods presented include the effects of the banking-related and wealth management-related acquisitions from the dates of consummation of the acquisitions. All transactions were accounted for using the purchase method of accounting. See Note 5 – Business Combinations in Notes to Consolidated Financial Statements for a discussion of the Corporation’s banking and Wealth Management acquisitions completed in 2008 and 2007 and 2006.

Forward-Looking Statements

This report contains statements that may constitute forward-looking statements within the meaning of the safe-harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, such as statements other than historical facts contained or incorporated by reference in this report. These forward-looking statements include statements with respect to M&I’s financial condition, results of operations, plans, objectives, future performance and business, including statements preceded by, followed by or that include the words “believes,” “expects,” or “anticipates,” references to estimates or similar expressions. Future filings by M&I with the Securities and Exchange Commission, and future statements other than historical facts contained in written material, press releases and oral statements issued by, or on behalf of, M&I may also constitute forward-looking statements.

All forward-looking statements contained in this report or which may be contained in future statements made for or on behalf of M&I are based upon information available at the time the statement is made and M&I assumes no obligation to update any forward-looking statements, except as required by federal securities law. Forward-looking statements are subject to significant risks and uncertainties, and M&I’s actual results may differ materially from the expected results discussed in such forward-looking statements. Factors that might cause actual results to differ from the results discussed in forward-looking statements include, but are not limited to, the risk factors in Item 1A, Risk Factors in this Form 10-K.

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Significant Transactions

Some of the more noteworthy transactions and events in 2008, 2007 and 2006 consisted of the following:

2008

On January 2, 2008, the Corporation completed its acquisition of First Indiana Corporation (“First Indiana”) based in Indianapolis, Indiana. First Indiana, with $2.1 billion in consolidated assets as of December 31, 2007, had 32 branches in central Indiana which became branches of M&I Marshall & Ilsley Bank on February 2, 2008. Stockholders of First Indiana received $32.00 in cash for each share of First Indiana common stock outstanding, or approximately $530.2 million.

On November 14, 2008, as part of the CPP, the Corporation agreed to sell 1,715,000 shares of the Corporation’s Senior Preferred Stock, Series B (the “Senior Preferred Stock”), having a liquidation preference of $1,000 per share, for a total price of $1.715 billion. The Senior Preferred Stock qualifies as Tier 1 capital and pays cumulative compounding dividends at a rate of 5% per year for the first five years and 9% per year thereafter. As a condition to participating in the CPP, the Corporation issued and sold to the UST a warrant (the “Warrant”) to purchase 13,815,789 shares (the “Warrant Shares”) of the Corporation’s common stock, at an initial per share exercise price of $18.62, for an aggregate purchase price of approximately $257.25 million. The term of the Warrant is ten years. Pursuant to the Securities Purchase Agreement entered into in connection with the transaction, until the UST no longer owns any shares of the Senior Preferred Stock, the Warrant or Warrant Shares, the Corporation’s employee benefit plans and other executive compensation arrangements for its senior executive officers must continue to comply in all respects with

On December 3, 2008, the Corporation completed its acquisition of a majority equity interest in Taplin, Canida & Habacht, Inc. (“TCH”). TCH, based in Miami, Florida, is an institutional fixed income money manager with approximately $7.3 billion of assets under management as of December 31, 2008. Total consideration paid at closing in this transaction amounted to $64.0 million, consisting of 4,863,221 shares of the Corporation’s common stock valued at $13.16 per common share.

On December 18, 2008, the Corporation announced it had introduced a corporate-wide program designed to keep families in their homes by helping home owners avoid delinquency and foreclosure, including a 90-day foreclosure moratorium on all owner-occupied residential loans for customers who agree to work in good faith to reach a successful repayment agreement. In addition to the foreclosure moratorium, the Corporation’s homeowner assistance program includes stipulation plans, loan modifications, extensions and short-term forbearance options that have contributed to the higher level of renegotiated loans.

The results of goodwill impairment testing at the end of the fourth quarter of 2008 indicated that the fair value of certain of the Corporation’s banking-related Reporting Units were less than their book values, resulting in an after-tax total non-cash charge to earnings for goodwill impairment in the amount of $1,487.9 million or $5.73 per diluted common share.

During 2008, the Corporation recognized income of $39.1 million due to the completion of the initial public offering (“IPO”) by Visa. As a result of the IPO, Visa redeemed 38.7% of the Class B Visa common stock owned by the Corporation. The gain from the redemption amounted to $26.9 million and is reported in Net Investment Securities Gains in the Consolidated Statements of Income. In addition, Visa established an escrow for certain litigation matters from the proceeds of the IPO. As a result of the funded escrow, the Corporation reversed $12.2 million of the litigation accruals that were originally recorded in 2007 due to the Corporation’s membership interests in Visa. The reversed accrual is reported in the Other line of Other Expense in the Consolidated Statements of Income. On an after-tax basis, these two Visa-related items reduced net loss by approximately $0.10 per diluted common share.

During 2008, the Corporation recognized an additional income tax benefit of $20.0 million, or $0.08 per diluted common share, related to how the TEFRA (interest expense) disallowance should be calculated within a consolidated group.

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During 2008, the Corporation re-acquired and extinguished $169.2 million of debt. The gain amounted to $14.7 million and is reported in Gain on Termination of Debt in the Consolidated Statements of Income. On an after-tax basis, this gain reduced net loss by approximately $0.04 per diluted common share.

Market disruptions in the equity and fixed income markets resulted in unexpected losses in the Corporation’s Wealth Management segment. Losses attributable to the Lehman Brothers bankruptcy, costs of providing credit support agreements and other market related losses amounted to $45.7 million in 2008. The losses are reported in the Other line of Other Expense in the Consolidated Statements of Income. On an after-tax basis, these losses increased net loss by approximately $0.11 per diluted common share.

The deterioration in the national real estate markets resulted in a significant increase in the provision for losses for unfunded commitments and other credit related charges. In addition, rising fuel costs earlier in 2008 resulted in write-downs of residual values associated with consumer vehicle leases. In total these provisions and write-downs amounted to $26.9 million and are reported in the Other line of Other Expense in the Consolidated Statements of Income. On an after-tax basis, these items increased net loss by approximately $0.07 per diluted common share.

During 2008, the Corporation recognized a loss related to one of its bank-owned life insurance (“BOLI”) policies. The BOLI policy contains a stable value agreement that provides limited cash surrender value protection from declines in the value of the policy’s underlying investments. During the fourth quarter of 2008, the value of the policy’s underlying investments declined due to disruptions in the credit markets. As a result, the decline in cash surrender value of the policy exceeded the protection provided by the stable value agreement. The loss amounted to $11.8 million or $0.05 per diluted common share and is reported as a reduction of Bank-Owned Life Insurance Revenue in the Consolidated Statements of Income.

During 2008, the Corporation recognized an other than temporary loss on an investment in a small-business lending venture. The loss amounted to $10.0 million and is reported in Net Investment Securities Gains in the Consolidated Statements of Income. On an after-tax basis, this loss increased net loss by approximately $0.02 per diluted common share.

During 2008, the Corporation recognized severance expense of $8.7 million in conjunction with its corporate-wide reduction in workforce. The expense is reported in Salaries and Employee Benefits in the Consolidated Statements of Income. On an after-tax basis, this loss increased net loss by approximately $0.02 per diluted common share.

2007

During 2007, the Corporation completed two banking acquisitions and one wealth management acquisition and, as previously discussed, completed the Separation.

During 2007, the Corporation sold three bank branches located in the Tulsa, Oklahoma market after management determined that exiting that market was a better allocation of resources as compared to the costs of further expansion in that market. The gain, which is a component of Other Income in the Consolidated Statements of Income, amounted to $29.0 million which increased income from continuing operations by $16.9 million or $0.06 per diluted common share.

During 2007, the Corporation sold its investment in MasterCard Class B common shares in order to monetize the significant appreciation in the market price of the common stock of MasterCard since its initial public offering. The realized gain, which is reported in Net Investment Securities Gains in the Consolidated Statements of Income, amounted to $19.0 million which increased income from continuing operations by $12.4 million or $0.05 per diluted common share.

During 2007, the Corporation called the $200 million 7.65% junior subordinated deferrable interest debentures and the related M&I Capital Trust A 7.65% trust preferred securities. The Corporation also terminated $1,000 million of Puttable Reset Securities (“PURS”), senior bank notes issued by M&I Bank. The Corporation realized losses of $83.7 million from these transactions, which are reported as Loss on Termination of Debt in the Consolidated Statements of Income. These losses reduced income from continuing operations by $54.4 million or $0.20 per diluted common share.

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During 2007, the Corporation recorded liabilities in connection with its share of the proposed settlement of the American Express antitrust litigation against Visa and other Visa litigation matters. While the Corporation is not a named defendant in any of these lawsuits, the Corporation and other Visa member banks are obligated to share in losses in connection with certain lawsuits under Visa’s by-laws. The expense, which is reported in Other Expense in the Consolidated Statements of Income, amounted to $25.8 million which decreased income from continuing operations by $16.8 million or $0.06 per diluted common share.

During 2007, the Corporation purchased $286.6 million of additional bank-owned life insurance. The net realizable value is reported, along with the Corporation’s other bank-owned life insurance, Bank-Owned Life Insurance in the Consolidated Balance Sheets. The increase in net realizable value is reported in Bank-Owned Life Insurance Revenue in the Consolidated Statements of Income.

The Corporation has a tradition of being committed to the betterment of the communities within the markets that it serves. Consistent with that tradition, the Corporation made a sizeable contribution to its charitable foundation in 2007. That expense, which is reported in Other Expense in the Consolidated Statements of Income, amounted to $25.0 million, which decreased income from continuing operations by $16.3 million or $0.06 per diluted common share.

During 2007, the Corporation remarketed the 3.90% STACKSSM of M&I Capital Trust B that were originally issued in 2004 as components of the Corporation’s 6.50% Common SPACESSM. In connection with the remarketing, the annual interest rate on the remarketed STACKS was reset at 5.626%, M&I Capital Trust B was liquidated and $400 million of 5.626% senior notes that mature on August 17, 2009 were issued by the Corporation in exchange for the outstanding STACKS. Each Common SPACES also included a stock purchase contract requiring the holder to purchase, in accordance with a settlement rate formula, shares of the Corporation’s common stock. The Corporation issued 9,226,951 shares of its common stock in settlement of the stock purchase contracts in exchange for $400 million in cash.

Beginning in the second quarter and continuing throughout the remainder of 2007, the Corporation completed three accelerated common share repurchases as well as open market repurchases of shares of its common stock under its authorized Stock Repurchase Program. In total, 10,765,889 shares of the Corporation’s common stock were acquired in 2007 at an aggregate cost of $437.1 million.

2006

During 2006, the Corporation completed two banking acquisitions and one wealth management acquisition.

Income from continuing operations for the year ended December 31, 2006 includes the impact of the mark-to-market adjustments associated with certain interest rate swaps. Based on expanded interpretations of the accounting standard for derivatives and hedge accounting it was determined that certain transactions did not qualify for hedge accounting. As a result, any fluctuation in the fair value of the interest rate swaps was recorded in earnings with no corresponding offset to the hedged items or accumulated other comprehensive income. The affected interest rate swaps were terminated in 2006. The impact, which is reported as Net Derivative Losses – Discontinued Hedges in the Consolidated Statements of Income, resulted in a decrease to income from continuing operations of $12.0 million or $0.05 per diluted common share.

On January 1, 2006, the Corporation adopted Statement of Financial Accounting Standards No. 123 (revised 2004); Share-Based Payment (“SFAS 123(R)”), the new accounting standard that requires all share-based compensation to be expensed. For the Corporation, additional expense was reported for its stock option awards and its employee stock purchase plan. In conjunction with the adoption of SFAS