Marshall & Ilsley Corporation’s (MI) third quarter 2010 loss of 32 cents per share was higher than the Zacks Consensus Estimate of a loss of 25 cents. However, the loss significantly narrowed down from 68 cents reported in the year-ago quarter.

Though the results for the reported quarter benefited from a lower provision for loan and lease losses, increased non-interest expenses and lower average loans and leases acted as the headwinds.

M&I’s third quarter net loss came in at $169.2 million, compared with a net loss of $248.4 million in the prior-year quarter.

Behind the Headlines

M&I’s total revenue was $610.5 million, down 1.2% from $618.5 million in the year-ago quarter. Total revenue was ahead of the Zacks Consensus Estimate of $573.0 million.

Tax equivalent net interest income for the reported quarter decreased 1.9% year over year to $387.0 million. Net interest margin (NIM) fell 3 basis points (bps) sequentially, but improved 32 bps year over year to 3.14%. Improvement in NIM was aided by changes in deposit mix but was offset by a higher-than-expected cash balance.

Non-interest revenues for the reported quarter were $223.5 million, down 0.2% from $224.0 million in the prior-year quarter. The slight decline was a result of fall in Service Charges on Deposits (down 5.2% from the prior year quarter to $31.8 million) and decrease in Mortgage Banking (down 39.5% year over year to $7.7 million), which were offset by increase in Wealth Management revenues (up 4.2% year over year to $69.5 million) and Net Investment Securities gains.

Non-interest expenses rose 3.6% year over year to $420.0 million. The increase was mainly due to hike in FDIC insurance and salaries and employee benefits expenses partly offset by intangible amortization expenses. Credit-related expenses were $37.2 million, down 44.0% from $66.4 million in the prior-year quarter.

Efficiency ratio for the reported quarter deteriorated and stood at 73.8%. In the prior-year quarter, efficiency ratio was 65.4%.

Assets Under Management and Assets Under Administration were $33.0 billion and $129.3 billion, respectively, at quarter-end, compared with the year-ago quarter’s $32.8 billion and $118.5 billion, respectively.

Credit Quality

Credit quality was a mixed bag during the quarter. While net charge-offs increased 99 bps year over year to 5.47% of average loans and leases, nonperforming assets declined 56 bps year over year to 5.04% of period-end loans & leases and other real estate owned.

At the end of the quarter, the allowance for loan and lease losses increased 42 bps year over year to 3.49% of total loans and leases. Provision for loan and lease losses was $431.7 million, down 25.4% from $578.7 million in the year-ago quarter.

Capital Ratios

As of September 30, 2010, M&I’s tangible common equity ratio was 8.3%, compared with 7.0% at September 30, 2009. Book value per share declined significantly to $9.39 from $12.98 at the end of the prior-year quarter.

Our Take

Though the turnaround in credit quality in the recent quarters has been impressive, contraction of loan book remains a drag. M&I continues to suffer from its exposure to construction and residential development loans in some of its newer markets such as Arizona and Florida.

Management has been able to meet most of the drastic cost-cutting, bonus-freezing and dividend reduction challenges but pressure on core revenues and higher credit costs will weigh on upcoming results.

M&I currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. Also, in the absence of any significant positive or negative catalysts, we maintain a long-term Neutral recommendation on the stock.

 
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