Marshall & Ilsley Loans Fuel Loss

Marshall & Ilsley on Thursday posted a worse-than-expected fourth-quarter loss, fueled primarily by a big increase to its provision for loan losses.
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Marshall & Ilsley


on Thursday posted a worse-than-expected fourth-quarter loss, fueled primarily by a big increase to its provision for loan losses.

The $64 billion Milwaukee-based holding company announced a net loss of $404 million, or $1.55 per share, in the fourth quarter, vs. a profit of $83.1 million in the third quarter and $494 million in the fourth quarter of 2007. The main factor in M&I's net loss was an $850 million quarterly provision for loan loss reserves. Marshall & Ilsley had lowered the provision to $155 million in the third quarter from $886 million in the second quarter.

The Thomson Reuters analyst consensus estimate for the fourth quarter was a 7-cents-per-share profit. The loss came in way below even the lowest analyst earnings estimate, which was a net loss of $1.03 per share, according to Thomson Reuters.

Marshall & Illsley also announced it was well on its way to reducing its workforce 8%, or by 830 jobs, and reduced its quarter dividend to a penny a share from 32 cents. A number of banks seem likely to cut


in the near future.

With earnings coming so far below analysts' estimates and with no preannouncement warning, shares were down 22% in early trading Thursday, to $8.39.

Here's a snapshot of some key loan quality numbers:

The fourth quarter provision kept ahead of $680 million in loan losses during the quarter, however, the annualized pace of net charge-offs increased to 5.38% of average loans. This is a very high charge-off rate for a bank holding company with only 3% of its total assets in consumer loans.

TARP Politics

As we discussed following

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warning that it would have to increase its loan loss provision, there are many voices in Washington making the fatuous argument that bank holding companies receiving capital infusions from the Treasury's $700 billion Troubled Assets Relief Program (TARP) need to immediately leverage the new capital by greatly expanding their lending activity.

Members of Congress have criticized TARP for doing little to help spur lending in frozen credit markets, one of its primary intentions. Much of the first half of the TARP funds were invested in preferred equity stakes in banks.

The Senate is expected to vote Thursday on whether to release the second half of TARP. Congress required that the Treasury Department come back to request the second $350 installment after the first half was committed, one of the compromises that helped win the bill's approval.

The Bush administration made the request at the behest of incoming President-elect Barack Obama, whose advisers were lobbying lawmakers to support the measure.

Marshal & Ilsely received $1.715 billion in TARP money on Nov. 15. The company addressed the political situation in its earnings release, stating that "new credit," along with a 90-day moratorium on owner-occupied residential foreclosures from the date the TARP money was received.

Of course, the "new credit" includes renewals of relatively-short-term commercial loans, which would have very likely been renewed anyway. That's what commercial borrowers usually expect, and a non-renewal often leads to a soured loan.

As far as the 90-day moratorium on foreclosures goes, it's certainly nice to help people stay in their homes and the pace of loan charge-offs may temporarily ease, but this could very well lead to additional losses for M&I, if home values continue to decline during the period. M&I has worked hard to modify delinquent loans, with renegotiated loans totaling $270 million as of Dec. 31, up from $181 million the previous quarter.

Comptroller of the Currency John C. Dugan said last month that 37% of 30-day-delinquent loans that were modified during the first quarter of 2008 became delinquent again after just three months and 55% after six months, according to statistics compiled by the agency and the Office of Thrift Supervision. Dugan said redefault rates "increased each month and showed no signs of leveling off after six months and even eight months," he said. This is why M&I includes renegotiated loans in its nonperforming loan totals.

While M&I's earnings announcement didn't contain sufficient information to calculate leverage and risk-based capital ratios, the company's tangible equity ratio was 8.9% as of Dec. 31, rising from 7.0% the previous quarter. However, considering that the company's net loan charge-offs for 2008 totaled $1.364 billion, with nearly half in the fourth quarter, it's pretty clear that loan losses are quickly eating through the new capital.

Since the company's provision for reserves kept ahead of the fourth quarter charge-offs, loan loss reserves covered 2.41% of total loans as of Dec. 31, up from 2.05% the previous quarter. However, with the annualized pace of charge-offs at more than twice that level and the pace of charge-offs increasing so dramatically in the fourth quarter, M&I probably has several more very rough quarters ahead.

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.