Magna Group Inc.'s recent writeoff of part of a $29 million loan has sparked a debate among analysts over how "extraordinary" it was.
Magna officials did not declare the resulting loan-loss provision an extraordinary item but encouraged analysts to treat it as such.
In the classic view, an extraordinary item is a one-time event that does not significantly taint a company's earnings. But Magna's treatment-it said that in the first quarter it had written off $14.4 million and increased its loan-loss provision by $12.5 million because of one large commercial loan-has analysts all over the map with their earnings estimates.
Where they stand depends on how they reacted to Magna's decision and how they rate the recoverability of the loan.
Magna officials say they have been forthright with analysts and hope to recover the loss. Although the company has not identified the borrower, published reports say it was John Connors, a businessman in Belleville, Ill., who is the brother of tennis star Jimmy Connors and a longtime customer of the bank holding company. John Connors did not return phone calls seeking comment.
The loan-loss provision made to reflect the writedown knocked 26 cents off first-quarter earnings, which were down 20 cents from the year-earlier level. Most analysts responded by lowering their 1997 earnings estimates for the $6.9 billion-asset company.
But at least one, Timothy Willi of A.G. Edwards in St. Louis, has chosen to treat the loss as a special item. After most analysts adjusted their earnings projections, First Call's consensus of 11 analysts put Magna's estimated earnings for 1997 at $2.18 a share. The projections ranged from a low of $2.09 to Mr. Willi's $2.40.
In other industries, a 31-cent variance between high and low is not uncommon. But banks have been relatively predictable, and there has been less disagreement among analysts, said Robert Gowen, a research assistant at First Call. "For a bank, that's a pretty large swing," he said of the Magna ratings.
Gary Hemmer, Magna's executive vice president of administration, said he is comfortable with the projections but he tried to convince analysts that the provision should be treated like a nonrecurring charge.
Mr. Willi agreed with that, and therefore his estimate was on the high side. "I just thought it was a one-time thing that they shouldn't be penalized for," he said. "I by no means say I don't focus on credit quality; I just don't think it's the beginning of a trend."
Moreover, Mr. Willi said he believes there could be a substantial recovery. In June Magna filed to foreclose on Mr. Connors' $3.8 million home in Belleville, which is just across the Mississippi River from St. Louis.
Magna chairman and chief executive officer Thomas Andes said the loan was secured with real estate and "marketable securities." Normally, Magna would not have made such a large loan, he said, but the borrower was well known and had a long relationship with the bank.
Some analysts said it would be folly to consider a bad loan as an extraordinary item. "I look at it as an operating item," said Michael Ancell, an analyst with Edward Jones in St. Louis. "Their business is making loans."
As for Mr. Willi, he is sticking with his numbers. Updating his projections after the second quarter, he left the $2.40 estimate in place. If Magna should recover on the loan, he said he would not raise his estimate.