Marshall & Ilsley Corp.'s (MI)'s second-quarter loss narrowed on sharply lower loss provisions, but loan quality continued to worsen during the quarter, dragging down shares as much as 19% in Friday trading.

"It appears that nonperforming loans and generally nonperforming assets have increased substantially sequentially, which undoubtedly will create a continued drag on earnings as a result of elevated provision expenses," Raymond James analyst Dennis Klaeser told Dow Jones Newswires.

M&I's non-performing loans and charge-offs both rose sequentially and from a year earlier, raising concerns about credit trends, in particular in the company's commercial real-estate portfolio.

In recent trading, M&I shares dropped 12% to $4.65 after earlier falling as low as $4.26. They have lost nearly 70% of their value over the past 12 months.

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, as well as commercial construction loans.

Now analysts say M&I's commercial real-estate portfolio is starting to hurt its results.

"That had not been a problem for the company," Oppenheimer analyst Terry McEvoy told Dow Jones Newswires, adding that M&I's problem last year was primarily concentrated in construction and development loans, especially in Arizona. He said commercial real estate comprises about 29% of M&I's portfolio.

McEvoy said it's likely many banks will also show problems with their commercial real estate holdings as they report quarterly earnings in the next few weeks.

"As we move through the credit cycle, commercial real estate, which had been healthy up to this point, is going to show stress and affect regional banks," McEvoy said.

In addition, he said investors will likely remain concerned about further capital raises by M&I until the company returns to profitability. Last month, M&I joined other banks in boosting capital, netting proceeds of about $552 million from selling 100 million shares, roughly 38% of its shares outstanding.

Chief Executive Mark Furlong said Friday the second quarter "continued to be challenging" but the company was working on resolving problem credits. "We remain committed to ensuring M&I emerges from this cycle in a position of strength and believe we are continuing to make progress toward our goal of returning to profitability," the CEO said.

M&I's loss narrowed to $114.3 million, or 50 cents a share, from $393.8 million, or $1.52 a share, a year earlier. The latest results included a net 8 cents in gains. Analysts polled by Thomson Reuters expected a loss, excluding items, of 69 cents.

Loan-loss provisions fell 2% from the prior quarter to $468.2 million and declined 47% from a year earlier. Charge-offs, or loans thought not to be collectible, rose to 3.71% of average loans and leases from 3.23% a year ago and 2.67% in the prior quarter. Non-performing loans, or those near default, rose to 5.18% of total loans and leases from 2% a year ago and from 5.15% in the prior quarter.

-By Shara Tibken, Dow Jones Newswires; 212-416-2189; shara.tibken@dowjones.com;

-By Mike Barris, Dow Jones Newswires; 212-416-2330; mike.barris@dowjones.com