Shares of Marshall & Ilsley ( MI) of Milwaukee closed at $7.78 Thursday or 0.9 times tangible book value. The stock was up 43% year-to-date.

TARP Status: The company owes $1.7 billion in TARP money, and has been making its dividend payments on government-held preferred shares.

Capital: Marshall & Ilsley's Tier 1 leverage ratio was 9.36% and its total risk-based capital ratio was 14.47% as of March 31. Guggenheim analyst Marty Mosby, in his report initiating his firm's coverage of M&I with a "Buy" rating, says the company "does not have the regulatory capital cushion to repay the TARP funds," and he expects the company to issue $1 billion in trust-preferred securities and another $1 billion in debt to repay TARP. This would be a big advantage to common shareholders, who would avoid having their positions diluted.

As we discussed in our look at banks that could be hurt by regulatory reform, Sen. Susan Collins's amendment to the bank reform legislation would bar banks from including trust-preferred equity in Tier 1 capital. If the amendment were enacted in its current form, the capital-raising plan discussed by Mosby would be untenable. Then again, the senator said last week that the exclusion of trust-preferred equity form Tier 1 capital would have to be phased-in.

Earnings: The first-quarter net loss to common shareholders was $140.5 million or 27 cents a share, following a 2009 loss of $859 million or $2.46 a share, as the company made elevated provisions for loan losses.

Asset Quality: Nonperforming assets comprised 5.55% of total assets as of March 31 according to SNL, down from 5.71% the previous quarter. The first-quarter net charge-off ratio was 3.89%, and reserves covered 3.55% of total loans. During the first quarter, net loan charge-offs totaled $423 million, which was the lowest level of loan losses over the past four quarters. While the company still reserved more than it lost -- adding $458 million to reserves during the quarter -- There were many signs that loan-quality problems had crested, since early-stage delinquencies had declined for four quarters and the inflow of nonperforming loans had declined to its lowest since the third quarter of 2008. .

Prospects: With the political and regulatory bias against trust-preferred equity, it seems likely that Marshall & Ilsley will at least consider a common equity raise. Some of that risk is baked into the current discounted price of the stock, which was trading for 9 times the consensus estimate for earnings in 2012. Marshall & Ilsley appears to be a decent play on the recovery for long-term investors. Mosby's 12-month target for the shares is $10, which represented a 29% gain from Thursday's close.
Who Owns Marshall & Ilsley?

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