Bloomberg adds M&I to list of banks with high nonperforming loans

Milwaukee-based Marshall & Isley Corp. was named to a rather daunting list last week: M&I Bank is the largest U.S. bank to own nonperforming loans that equal 5 percent or more of its holdings, a level former regulators say can wipe out a bank's equity and threaten its survival.

The list was compiled by Bloomberg News, which said more than 150 publicly traded U.S. lenders own nonperforming loans that equal 5 percent or more of their holdings.

The number of U.S. banks exceeding the threshold more than doubled in the year through June, according to data compiled by Bloomberg, as real estate and credit-card defaults surged.

The Bloomberg report is headlined, "Toxic loans topping 5% may push 150 banks to point of no return."

Missed payments by consumers, builders and small businesses pushed 72 lenders into failure this year, the most since 1992. More collapses may lie ahead as the recession causes increased defaults and swells the confidential U.S. list of "problem banks," Bloomberg reported.

M&I, Wisconsin's largest bank, reduced its nonperforming loans last month to 5.01 percent from 5.18 percent after selling $297 million in soured loans, mostly residential mortgages in Arizona.

M&I has "been very aggressive in identifying and tackling credit challenges," chief financial officer Greg Smith told Bloomberg. Smith said 26 percent of loans classified as nonperforming are overdue by less than the industry's typical standard of 90 days. With those excluded, the bank's nonperforming ratio would be around 3.7 percent, Smith said.

While 5 percent can be "fatal" for home lenders, commercial real estate lenders may be able to withstand higher rates, said William Black, former lawyer at the Federal Home Loan Bank of San Francisco and the Office of Thrift Supervision. Commercial loans carry higher interest rates because they are riskier, he said.

"At the 5 percent range, you're probably hurting," said Black, an associate professor of economics and law at the University of Missouri-Kansas City. "Once it gets around 10 percent, you're likely toast."