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Marshall & Ilsley Corp. (MI) said Tuesday that losses from its most troubled portfolios of loans will peak in the first or second quarter of 2010. The Milwaukee-based bank also disclosed some unexpected losses, most notably from loans to other troubled banks, and said its third quarter results will miss expectations.

M&I said bad loans fell in the third quarter for the first time on a sequential basis in four years, a possible sign that the credit woes affecting banks may have peaked.

But M&I executives also made clear that the bank expects more pain from the economy and depressed housing market.

"There simply are an inadequate number of consistent trends to reinforce the sentiments that the economy is stabilizing and better times are within sight," said President and Chief Executive Mark Furlong.

Shares in M&I were recently down 3% to $7.70 in composite trading.

The company said it projects a quarterly loss wider than analysts' expectations amid a nearly $185 million provision for souring loans to other bank holding companies.

Those loans became troubled in part because some of those bank borrowers drew enforcement actions from regulators, the bank told Dow Jones Newswires.

Wisconsin's largest bank has cut costs and jobs and slashed its dividend to preserve cash. It has struggled with heavy exposure to some of the most troubled housing markets, including Arizona and Florida, and has faced acute losses from loans for housing developments.

Net charge-offs, or permanent losses, from those Arizona and Florida loans will peak in the first half of next year, the bank said.

The company said Tuesday it expected nonperforming loans to fall $170 million from the second quarter, or 4.9% of total loans. It also sees early stage delinquencies down $220 million, or 20%, sequentially, putting them at the lowest level in six quarters.

The company reiterated its forecast for a loan-loss provision of $390 million to $400 million, excluding nearly $185 million for holding-company loans. That compares with the $468.2 million in the second quarter and $155 million a year earlier. Marshall & Ilsley said the special provision was due to new regulations on bank holding companies.

-By Marshall Eckblad and Kevin Kingsbury, Dow Jones Newswires; 212-416-2156; kevin.kingsbury@dowjones.com