Construction Loans Threaten Some Banks

Of course, we don't know what Wachovia will report for the second quarter, but based on recent results, we could be looking at an alarming number of delinquent construction loans as the institution's option-ARM mortgage portfolio continues to twitch.

The banks on the list with the highest asset concentrations in construction loans as of March 31 included Branch Banking and Trust Company (held by BB&T(BBT Quote)), Regions Bank, (a unit of Regions Financial(RF Quote)) and M&I Marshall & Ilsley Bank (held by Marshall & Ilsley(MI Quote)).

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Branch Banking & Trust's construction portfolio comprised 14.9% of total assets as of March 31. Its construction loan quality was the best on the list, with a ratio of nonperforming construction loans of 1.90%, and delinquent construction loans at 3.03%. As you can see in the second table, the institution's overall asset quality measured up pretty well in this environment, with nonperformers comprising 0.89% of total assets and reserves covering 98.41% of nonperforming loans as of March 31.

Regions Bank was in the middle of the pack, with nonperforming construction loans comprising 3.72% of total construction loans and delinquent construction loans 5.79%. Looking at overall asset quality, the nonperforming assets ratio was 1.16%, and reserves covered 95.48% of nonperforming loans, which is pretty strong reserve coverage all things considered.

M&I Marshall & Ilsley Bank had the highest concentration of construction loans, which totaled $10 billion, or 17% of total assets as of March 31. Nonperforming construction loans increased to 4.94% of total construction loans, from 4.64% in December.

More alarmingly, delinquent construction loans increased to 9.17%, from 6.59% in December. M&I's overall asset quality slid over the past two quarters, with nonperforming assets comprising 1.57% of total assets as of March 31, compared to 1.39% in December 2007, 0.89% in September 2007 and 0.65% in March 2007. Reserves covered nearly 68% of nonperformers as of March 31, and the bank had the highest risk-based capital ratio on the list, at 11.79%.