Construction Loans Threaten Some Banks

Based on recent filings, Marshall & Ilsley is confident it won't have to raise capital like so many other regional banks. The holding company increased its quarterly dividend to 32 cents a share on April 22, giving shares a current yield of 5.60%. While the holding company filed a shelf registration of 6 million shares on May 8, it said it had no immediate plans to issue common shares, but might do so to fund acquisitions.

It will be interesting to see how things play out over the next few quarters, and whether M&I will be forced to change its tune like so many other regional banks.

Three more large regional banks posted alarming delinquency figures for their construction portfolios:

SunTrust Bank (held by SunTrust Banks(STI Quote)) reported nonperforming construction loans at 5.94% of total construction loans, with delinquent loans comprising 10.53% of total construction loans, as of March 31, 2008.

On an overall basis, nonperforming assets comprised 1.51% of total assets, increasing sharply from 1.04% in December 2007. Loan loss reserves covered 65.46% of nonperforming loans as of March 31. This was the lowest reserve ratio on the list. While SunTrust did make a large first-quarter provision for loan losses of $560 million, the institution's reserve coverage as a percentage of nonperforming loans has declined over the past three quarters. SunTrust's risk-based capital ratio of 10.66% was the second lowest on the list.

Unlike many regional banks which have taken one or more quarterly losses over the past year as they beefed-up reserves, SunTrust hasn't been forced to do so. However, if the second quarter presents a similar decline in loan quality to the first, the institution may be forced to post a significant loss, which would probably force the holding company to take steps to preserve capital (cutting dividends or continuing to shrink the balance sheet) or seek more capital..