Marshall & Ilsley Corporation’s ( ) first quarter 2011 loss of 27 cents per share exceeded the Zacks Consensus Estimated loss of 18 cents but was in line with the prior-year quarter result.

M&I’s results for the reported quarter suffered mainly due to lower net interest income and non-interest income. However, decrease in non-interest expenses and provision for loan and lease losses were the positives. Also, the company’s credit quality showed mixed results during the quarter.

M&I’s first quarter net loss came in at $142.0 million as against $140.5 million reported in the comparable period last year.

Quarter in Detail

M&I’s total revenue for the reported quarter stood at $538.6 million, down 14.6% from $630.8 million in the year-ago quarter. Total revenue also missed the Zacks Consensus Estimate of $565.0 million.

Tax equivalent net interest income (NII) for the reported quarter plunged 13.9% year over year to $352.1 million. Net interest margin (NIM) declined 5 basis points (bps) year over year to 3.08%.

The fall in both NII and NIM was primarily attributable to higher-than-expected cash balance, reduction in earning assets, and lower yielding investment securities portfolio. But, these negatives were partly mitigated by lower funding costs.

Non-interest revenues for the reported quarter were $186.5 million, down 15.9% from $221.7 million in the prior-year quarter. The drop was primarily a result of significant decline in Other revenue, which was partially offset by higher Mortgage Banking revenues, Service Charges on Deposits, and Wealth Management revenues.

Non-interest expenses fell 10.9% year over year to $326.0 million. Credit-related expenses were $27.4 million, down from $40.6 million in the year-ago quarter.

Efficiency ratio deteriorated from 58.0% in the prior-year quarter and stood at 61.4% in the quarter under review.

Asset Position

At March 31, 2011, Assets under Management were $34.1 billion versus 32.7 billion in the year-ago quarter. Assets under Administration were $136.2 billion at March 31, 2011 compared with $124.6 billion at March 31, 2010.

Credit Quality

Credit quality was a mixed bag during the quarter. While non-performing assets declined 19 bps year over year to 5.40% of period-end loans & leases and other real estate owned, net charge-offs increased 88 bps year over year to 4.82% of average loans and leases.

At the end of the quarter, the allowance for loan and lease losses increased 36 bps year over year to 3.91% of total loans and leases. However, provision for loan and lease losses stood at $418.8 million, down 8.6% from $458.1 million in the year-ago quarter.

Capital Ratios

As of March 31, 2011, M&I’s tangible common equity ratio was 7.9% compared with 8.1% as of March 31, 2010. Book value per share declined significantly to $8.65 from $9.95 as of March 31, 2010.

Peer Performances

In M&I’s peer, Northern Trust Corporation’s ( NTRS - Analyst Report ) first quarter earnings missed the Zacks Consensus Estimate owing to a persistently low interest rate environment that negatively affected NIM.

However another competitor, Huntington Bancshares Inc.’s ( HBAN - Analyst Report ) first quarter 2011 earnings outpaced the Zacks Consensus Estimate. The company’s better-than-expected results reflected a significant improvement in credit quality, a modest growth in loans and deposits, an increase in NIM, and low levels of non-interest expenses. However, the company’s top line declined during the quarter.

Our Viewpoint

Though the turnaround in credit quality in the recent quarters has been impressive, a lack of core deposit growth and the ongoing interest rate volatility are expected to keep M&I’s NIM under pressure.

Management has been able to meet most of the challenges with the help of outflow cost funding, disciplined deposit pricing and the preservation of its strong capital base, but pressure on core revenues and higher credit costs will weigh on upcoming results. However, the company’s impending merger with Bank of Montreal ( BMO - Snapshot Report ) would provide some relief to the company and also lessen much of its woes.

M&I currently retains a Zacks #3 Rank, which translates into a short-term ‘Hold’ rating. Also, considering the fundamentals, we maintain a long-term “Neutral” recommendation on the shares.