Construction Loans Threaten Some Banks

KeyBank NA (a unit of KeyCorp(KEY Quote)) had the second-worst construction loan quality on the list. The institution's ratio of nonperforming construction loans was 8.19% and its delinquent construction loan ratio was 13.05% as of March 31.

On May 27, KeyCorp filed an 8-K forecasting that 2008 charge-offs would increase to 1% to 1.3% of average loans. This would compare to net charge-offs of 0.38% during 2008. With a $79 billion loan portfolio, charge-offs could total over a billion, which would wipe-out most of KeyBank's loan loss reserves.

KeyBank's risk-based capital ratio was a decent 11.18% as of March 31, and the holding company raised $740 million in additional capital during the first quarter. Based on the charge-off forecast, more capital raising activity is likely.

Finally, the bank with the worst construction portfolio quality on the list is National City Bank (held by National City(NCC Quote)).

The institution's ratio of nonperforming construction loans was 8.38% and its ratio of delinquent construction loans was 13.71% as of March 31. That's potentially another $1.65 in bad construction projects that National City will have to will have to take over, complete and dispose, in addition to all the problems it is having in its permanent residential mortgage portfolio.

Recently, several stock analysts upgraded National City's stock, saying it represents value after raising $7 billion in new capital in April. TheStreet.com reported in late May that the holding company was considering selling assets, which would also prop up National City's capital ratios. We'll have to wait and see how the institution looks when it releases second-quarter earnings, which will reflect the higher capital levels and, presumably, higher nonperforming loans.