Marshall & Ilsley
shares were on the rise Wednesday, after reporting a narrower second-quarter loss than analysts' recently lowered expectations.
The Milwaukee-based bank posted a net loss of $394 million, or $1.52 per share, for the quarter. The loss per share was four cents less than analysts' consensus estimate, which was reduced after the $64 billion bank holding company on July 3 predicted a loss of as much as $1.60 per share.
With the slight positive surprise, shares were up 6% to $12.39 in early morning trading. Shares returned a negative 67% over the past year, through Tuesday's close.
Following the theme for so many large regional banks, the main factor in the quarterly loss was a provision for loan losses of $886 million. This followed net loan charge-offs of $401 million, with construction and development loans comprising the vast majority of the charge-offs.
After the charge-offs, nonperforming assets comprised 1.94% of total assets as of June 30, increasing from 1.52% last quarter and 0.70% in June 2007.
The annualized ratio of net charge-offs to average loans was a very high 3.23%. This paints a rather ugly scenario.
M&I's loan loss reserves covered 99% of nonperforming loans and 2.07% of total loans as of June 30. If the company continues charging off loans at an annual pace of 3.23%, it will quickly burn through its loan loss reserves, and several more quarters of elevated provisions for loan loss reserves will be needed. This will pressure the company's earnings for several more quarters.
Here's a summary of M&I Corp's asset quality as of June 30:
Construction Loan Exposure, Capital Concerns
Commercial and residential construction and development loans totaled approximately $10 billion, or 20% of total loans as of June 30. Nonperforming construction and development loans totaled $661 million, or 6.63% in this category. That's an increase of 55% just from last quarter. Residential land and construction loans make up the bulk of the problem loans in this category.
Marshal and Ilsely doesn't provide enough information in its earnings releases to calculate the standard Tier-1 leverage and risk-based capital ratios. The company does provide the following:
While the company pointed out that the June 30 tangible common equity ratio of 7.0% was 1.2% higher than a year earlier, both ratios dropped quite a bit during the second quarter. M&I is facing what is by now a familiar problem in the industry. Its problem loans are increasing so quickly that it will have to consider taking steps to shore up capital over the next couple of quarters.
Possible steps include shrinking its balance sheet, raising capital through a preferred offering, reducing or eliminating its annual dividend on common shares of $1.28. Shares are yielding a whopping 11.10% at current prices.
Leaving credit quality aside, there were some positive trends in M&I's earnings release, as the company grew its loan portfolio 11% over the past year, with net interest income increasing 12%.
The company's wealth management revenue increased 14%, a very impressive number for this lucrative fee-based business. The company had assets under management of $25 billion and assets under administration of $106.4 billion. Wealth management comprised 11.7% of the company's revenue in the second quarter, a slight increase from a year ago. Hopefully M&I will accelerate the pace of growth in this lucrative area.
Philip W. van Doorn joined TheStreet.com 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.