Tens of millions of dollars in loans have gone bad at Southwest Florida banks during the real estate slump.

Are those banks ready to handle them?

Federal regulators are worried that some banks in Florida and across the nation may be ill-prepared to deal with their battered loan business.

U.S. banks have set aside just 89 cents to cover every $1 in nonperforming loans, or loans that borrowers are no longer paying off, said Sheila Bair, chairman of the Federal Deposit Insurance Corp.

That is the lowest "coverage ratio" in 15 years.

"It's the kind of thing that gives regulators heartburn," Bair said.

In Florida, one of the country's hardest-hit real estate markets, the coverage ratio is just 50 cents per $1 in bad loans.

"Bair is going to need more than a couple of Zantacs when she gets to Florida," says bank analyst Ken Thomas.

Regulators fear that banks have been slow to recognize their loan problems, while borrowers are falling further behind on their payments.

And those problems could get worse as the housing slump spreads to other areas of the economy.

Forty percent lose money

Forty percent of Florida's 314 banks and thrifts lost money in the first quarter of 2008, compared with just 18 percent one year earlier.

Florida's financial institutions earned just $30.6 million in the quarter, down sharply from $337 million last year.

Fifteen of the 23 banks based in Sarasota, Manatee and Charlotte counties were unprofitable in the first quarter. Several others eked out small profits, such as $4,000 at Englewood Bank.

Even the credit unions have been hit with financial distress.

Sarasota Coastal Credit Union, the area's largest, lost $356,000 in the first quarter. Among the state's major credit unions, GTE Federal lost $8.1 million and Suncoast Schools dropped $6.4 million.

Nationwide, banks posted $19.3 billion in first-quarter earnings, down 46 percent from the $35.6 billion earned the year before.

FDIC officials have warned that the banking industry is likely to further weaken this year.

Profits have evaporated as banks tackle their loan woes. Banks set aside $37.1 billion in the first quarter to cover future losses -- more than four times the level from last year and the most in any quarter in 20 years.

Four banks have failed so far this year, already one more than in 2007. The FDIC has beefed up its staff of examiners, bracing for a spike in failures.

The FDIC's "problem list" swelled from 76 to 90 banks in the first quarter.

Bank analyst Richard Bove of Lutz says the outlook is not good. The economy is being dragged into a recession, but the Federal Reserve will be handcuffed because inflation is growing and it will have to raise interest rates, he said.

"The impact on banks will be to drive loan losses to levels only experienced in a depression," Bove said. "The annualized first-quarter 2008 domestic loss numbers are higher than in any year than 1934 already."

Past-due loans triple

In Florida, the number of past due and nonaccrual loans nearly tripled over the year. Among commercial banks, bad loans rose to 2.42 percent of all loans from just 0.63 percent.

Florida's loan problems may be even worse. Its biggest banks are based in other states, so bad loans in Florida held by Charlotte, N.C.-based Bank of America or Atlanta-based SunTrust show up in those home states.

"We are the fifth biggest banking colony, which means roughly three-fourths of banking activity as measured by deposits are controlled by nonlocal banks like B of A, Wachovia and SunTrust," Thomas said. "Their problem loans in Florida show up in the overall North Carolina and Georgia numbers."

It is not just that loans are no longer being paid off. Real estate values have plunged, and many borrowers owe more on their mortgages than their homes are worth.

Florida ranked fifth in the nation for the number of banks rated "problematic" by BauerFinancial Inc., a Coral Gables firm that has been tracking and rating banks since 1983.

Eight percent of Florida-based banks received a Bauer grade of two stars or lower, said firm president Karen Dorway. Nationwide, 281 banks and thrifts, or just 3.3 percent, are on Bauer's problem list.

"Florida banks have shown a dramatic increase in nonperforming assets," Dorway said. "A lot of construction lending has reared its ugly head this quarter."

Locally, First Priority Bank and Freedom Bank, both in Bradenton, received Bauer's lowest grade of zero.

Century Bank of Sarasota, Community National Bank of Sarasota County in Venice, and Peninsula Bank of Englewood received two stars.

Three lines of defense

Banks have three lines of defense to cover their problem loans -- out of earnings, out of their loan-loss allowance or out of their capital.

Regulators prefer that banks keep adequate loan-loss reserves -- money socked away to cover bad loans -- rather than tap into their capital safety nets.

But FDIC spokesman David Barr said those reserves are not keeping pace with the growing amount of troubled loans.

"This is something that we are watching and are concerned about," he said. "Banks need to start setting more aside overall."

Thomas, a Miami-based bank analyst, thinks banks should have 100 percent coverage ratio, or $1 in reserves for every $1 in bad loans.

"When the coverage ratio goes below 100, that is a yellow flag," he says "When you are below 50, it is a red flag."

Some of the area's weakest banks report some of the lowest bad-loan coverage ratios, according to analyst reports:

First Priority had $40.8 million in nonperforming assets as of March 31, but had reserved for just 21 percent (21 cents per $1).

At First Priority, which analysts have called one of the weakest banks in the country, nonperforming assets account for 15.65 percent of its total assets, the highest percentage in the nine-county Southwest Florida region measured by SNL Financial.

Bradenton's Freedom is covering 62 percent of its $23.7 million in nonperformers. Freedom posted a loss of $7.8 million in the first quarter.

Community National of Sarasota County reported 31 percent reserves to its $5 million in nonperforming assets.

Regulators are closely watching this Venice bank, which lost $511,000 in the quarter. The Office of the Comptroller of the Currency in April found "unsafe and unsound" banking practices and ordered Community National to reduce its high level of loan risk and better manage its lending business.

Other locally based, established banks that were in the red this year were Bank of Venice, Century Bank, Community Bank of Manatee, First State Bank and LandMark Bank.

Local start-up community banks -- those less than two years old -- all lost money as well, but that is expected until they have time to grow. Those include Florida Bank, Florida Shores-Southwest, Insignia and Sabal Palm in Sarasota County; 1st Manatee in Manatee County; and Calusa National and National Bank of Southwest Florida in Charlotte County.

More bank failures?

With some banks failing to prepare for trouble, analysts and regulators are girding for an upswing in bank failures.

Several analysts have predicted up to 200 failures among the nation's 8,494 banks and thrifts this year. That would fall well short of the post-Depression record of 534 failures in 1989, but would be the most since the early 1990s.

Others, however, are not nearly as pessimistic.

Thomas, for one, forecasts no more than two dozen failures.

"Banks are so much better capitalized than before," he said. "We went through the entire recession in 2001 and had 11 failures in 2002."

Regulators also are quicker to step in and merge foundering banks into healthy ones before they fail.

Coast Bank of Bradenton never would have survived on its own. With regulators watching every step, Coast was sold late last year to First Banks Inc. of St. Louis at a price that burned stockholders but saved the FDIC from having to cover uninsured deposits.

But Thomas says the banking system problems still have a ways to go.

"I don't see a bottom until 2009 and perhaps 2010. I don't see normal price appreciation in key Florida housing markets until 2011. The peak was summer 2005, and it looks like a five-year correction or cycle from peak to trough."

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