Is It Safe? M&I Misses Out on Bank Rally - TheStreet

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Marshall & Ilsley


reported a smaller second-quarter loss than many analysts had expected, but mounting loan charge-offs, weak revenue and the company's dour outlook point to continued losses.

The Milwaukee, Wis.-based holding company last Friday reported a loss of $139 million, or 50 cents a share, narrower than the Thomson Reuters analyst consensus of 69 cents. The shares dove 12% on the news, on a day when the

S&P 500 Financials Index

was down just 1%.

The loss included $25 million in dividends on preferred shares sold to the Treasury in November, when Marshall & Ilsley, or M&I, received a $1.7 billion capital infusion via the Troubled Asset Relief Program, or TARP. The bank also paid $18 million for a special assessment by the Federal Deposit Insurance Corp. that the agency collected from all domestic banks and thrifts.

Chief Executive Mark Furlong said: "We remain committed to ensuring M&I emerges from this cycle in a position of strength and believe we are continuing to make progress toward our goal of returning to profitability."

Several large holding companies that received TARP money have already repaid the Treasury, including

JPMorgan Chase

(JPM) - Get Report


Goldman Sachs

(GS) - Get Report


Morgan Stanley

(MS) - Get Report


U.S. Bancorp

(USB) - Get Report


While M&I isn't in a position to return TARP money anytime soon, the company raised $552 million in common equity in May, and reported that its tangible common equity ratio increased to 7.3% as of June 30, from 6.4% in March.

Nonperforming assets stood at $2.87 billion as of June 30, or 4.81% of total assets, up from 3.94% the previous quarter and 1.92% a year earlier.

Net charge-offs (actual loan losses) for the second quarter were $453 million, up from $328 million in the first quarter and $401 million for the second quarter of 2008. The annualized ratio of net charge-offs to average loans for the second quarter was 3.71%, up from 2.67% during the first quarter and 3.23% in the second quarter of 2008.

Loan-loss reserves covered 2.83% of total loans as of June 30. While reserve coverage increased slightly from the previous quarter, it was well behind the annualized pace of charge-offs. The company set aside $468 million for loan-loss reserves during the second quarter, compared with $478 million the previous quarter and $886 million in the second quarter of 2008.

Since the bank sets aside reserves for nonaccrual loans based on what it expects to recover, it's hard to argue that Marshall & Ilsley's loan-loss reserves are too low. However, if charge-offs continue at the pace set in the second quarter, the company will have to bump up provisions over coming quarters, hurting earnings further.

The company's nonperforming assets are concentrated in its construction portfolio, which comprised 14% of total loans as of March 31, and is winding down from its peak of 23% in the third quarter of 2007.

So is there money to be made investing in M&I? The shares hit a closing low of $3.11 on March 5, after which they rose 49% through Friday, compared with a 97% return for the S&P 500 Financials Index. Other holding companies with stocks that reached their lows at about the same time have returned a lot more over the same period, including

Bank of America

(BAC) - Get Report

, up 307%;


(C) - Get Report

, up 196%; and the troubled

Fifth Third Bancorp

(FITB) - Get Report

, up 412%.

Investors have been wary of Marshall & Ilsley during the rally in bank stocks. But with the company having successfully raised capital by selling 100 million common shares in May, further dilution over the short term is unlikely.

M&I is a difficult pick for short-term investors, since it has lagged behind. And those with long-term views must be patient, as M&I's operating earnings are very weak.

Philip W. van Doorn joined Ratings., Inc., in February 2007. He is the senior analyst responsible for assigning financial strength ratings to banks and savings and loan institutions. He also comments on industry and regulatory trends. Mr. van Doorn has fifteen years experience, having served as a loan operations officer at Riverside National Bank in Fort Pierce, Florida, and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a Bachelor of Science in business administration from Long Island University.