Marshall & Ilsley Back In Black

Marshall & Ilsley (MI Quote - Cramer on MI - Stock Picks) shares were down 2.8% to $18.47 after the company swung to a sequential profit in the third quarter, but reported a drop in earnings from the year ago period.

Marshall & Ilsely reported third quarter net income of $83.1 million, or 32 cents per share, compared to a net loss of $394 million, or $1.52 per share, for the second quarter. The bank reported net income of $220 million, or 83 cents per share, in the third quarter of 2007.

Third quarter earnings came in ahead of the Thomson Reuters consensus estimate of 21 cents a share for the third quarter.

While a blind year-over-year comparison would show a 62% drop in earnings, the real news is that the $63.5 billion Milwaukee, Wis. bank holding company was able to lower its provision for loan loss reserves to $155 million for the third quarter, from $886 million in the second quarter, and move back into positive earnings territory.

Asset Quality

M&I was quick to point out that it maintained a ratio of loan loss reserves to total loans of 2.05% as of Sept. 30. This kept the company's reserve level well ahead of its 1.21% annualized ratio of net charge-offs to average loans for the third quarter.

Asset Quality

Click here for larger image.

As you can see in the table, last quarter's results presented a more alarming scenario, as the net charge-off ratio was 3.23%.

While M&I was able to greatly reduce charge-off activity during the third quarter, its total nonperforming loans increased 31% from the second quarter. Since loan quality continues to decline, it's possible the company will again experience a period of elevated charge-offs and pressure on earnings.

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