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Marshall & Ilsley Back In Black

Marshall & Illsely swung to a sequential profit in the third quarter, but earnings fell vs. the year-ago period.

Marshall & Ilsley


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.

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.

Commercial and residential construction and land loans are the primary concern, as they are for so many banks. These loans totaled $9.6 billion and comprised 19% of M&I's total loans as of Sept. 30. Nonperforming construction and land loans totaled $661 million as of Sept. 30, or 8.46% of total C&D loans, and an increase of 25% from last quarter.


Marshal and Ilsely doesn't provide information in its earnings releases to calculate the standard Tier-1 leverage and risk-based capital ratios. The company reported that its capital levels held up, with a tangible common equity ratio of 7.0% as of Sept. 30, the same as last quarter and significantly higher than the 6.4% reported a year ago. The ratio of equity to total assets was 10.2%, compared as of Sept. 30, compared to 10.1% in June and 11.6% in Sept. 2007.

The company continued paying its usual quarterly dividend of 32 per share during the third quarter. Common shares are yielding a 7.14% at current prices, and have climbed back from a recent closing low of $11.50 on July 14.

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.