Bank of Montreal's surprise deal for Marshall & Ilsley Corp. indicates consolidation is fast coming to the regional bracket, with those banks still plagued by problem business real estate loans the most vulnerable.

The $4.1 billion agreement also shows that those types of loans, which became an obsession for midsize lenders before the crisis, may be in worse shape than M&I and other industry laggards will admit. The Canadian company's inspection of M&I's loan portfolio found that it is barely halfway through its losses on loans to home builders, apartment owners and other commercial borrowers.

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