Oct. 6 (Bloomberg) -- Marshall & Ilsley Corp., Wisconsin’s largest bank, boosted its provision for expected loan losses in the third quarter by 25 percent, citing loans to four banks it didn’t identify.

The total provision could be as much as $585 million, Milwaukee-based Marshall & Ilsley said in a statement today. In its forecast of Aug. 10, the bank said money set aside for loan losses would be “significantly less” than the $468 million reported during the second quarter.

“As we move through that credit cycle these are the banks that are weak and weakening and unfortunately M&I has exposure to some of them,” said Dennis Klaeser, an analyst at Raymond James & Associates, referring to the banks M&I cited. “It is a segment that is under stress.”

Marshall & Ilsley is trying to rebound after posting a $2 billion loss last year amid rising defaults on real estate loans in Florida and Arizona. The third-quarter deficit was 68 cents to 70 cents a share, the company said today. The Federal Deposit Insurance Corp. said the number of “problem” banks rose to 416 through June, and estimated that failures could cost the agency’s deposit fund as much as $100 billion through 2013.

The four banks cited by the lender today aren’t affiliated with Marshall & Ilsley, and have been customers for years, Chief Financial Officer Greg Smith said in an interview. Most of the loans involve Midwest real estate and the potential losses “came to a head” since August, he said.

‘Consistent’ Trends

“The fundamental trends this quarter were consistent with the guidance we previously provided,” Smith said. “That’s why we consider the bank holding company component to be a special provision.”

Moody’s Investors Service placed Marshall & Ilsley senior debt ratings under review for possible downgrade Sept. 15 on concern that the lender may report more losses tied to real estate. The debt is rated A3.

“If Moody’s concludes that a lower rating for Marshall & Ilsley is warranted, a multi-notch downgrade is possible absent any material capital-raising initiatives,” Moody’s analysts said, led by managing director Robert Young.

Marshall & Ilsley said the customer banks may have been the target of regulatory actions, had difficulty raising capital and suffered deterioration in loan portfolios.

Sara Schmitz, a Marshall & Ilsley spokeswoman, declined to identify banks that received loans or comment on what regulatory actions had been taken against those firms.

Loans that aren’t accruing interest probably declined by $170 million in the third quarter because of improving credit quality trends, particularly in Florida and Arizona, Chief Executive Officer Mark Furlong said on a conference call. It would be the first quarterly decline in nonperforming loans in four years, the company said.

Nonperforming loans declined to about 4.9 percent, compared with 5.01 percent for unpaid loans and leases in the second quarter, the company said. Full results for the third quarter are scheduled to be reported Oct. 22.

Marshall & Ilsley slid 41 cents, or 5.2 percent, to $7.53 at 2:25 p.m. in New York Stock Exchange composite trading. It has declined 45 percent this year.

To contact the reporter on this story: David Mildenberg in Charlotte at dmildenberg@bloomberg.net

Last Updated: October 6, 2009 14:47 EDT