Earlier this year, TheStreet.com Ratings identified the 20 banks and thrifts with the biggest exposure to bad construction loans; not surprisingly, three of them were in Florida, one of the centers of the speculative housing boom and bust.

So we decided to home in on the Sunshine State's banks and thrifts with the most exposure to problem loans of any kind. It turns out there are at least six that could be facing a capital shortage unless the real estate market turns around quickly.

As we saw with Coast Bank of Florida, First Florida Bank and Florida Community Bank, it is not just mortgages but also construction loans that are a big problem for troubled institutions in this market. Many large housing developments in Florida have gone bad as national builders pull out of major projects.

BankAtlantic Bancorp ( BBX), another Florida institution (which is controlled by BFC Financial ( BFF)), also has taken some heat for its outsized bets on commercial real estate.

When banks are undercapitalized, investors aren't the only ones who get hurt; depositors also need to be concerned, especially those with uninsured deposits. The Federal Deposit Insurance Corp. usually insures accounts of up to $100,000. And before you scoff at the notion of having deposits of that size, consider that a business, municipal entity or other organization you're affiliated with can easily exceed the limits and have uninsured money flowing through a bank on any given day.

As we saw with NetBank ( NTBK), you can take a big hit when a bank is closed down, with no advance notice from regulators.

Because the full set of compiled data from third-quarter regulatory filings for the nation's banks and thrifts will not be available until late December, we started by preparing a list of all the Florida institutions with at least 2% nonperforming assets as of June 30. We then updated the data for these institutions as of Sept. 30, 2007. We then pared the list to the 18 institutions with nonperforming assets comprising 3% or more of total assets. (With over 300 banks and thrifts in Florida, it's quite possible that we missed one or more institutions of concern.)

The nonperforming loan ratios at many of the institutions on this list have risen to alarming levels, and loan-loss reserves are low for the entire group. While all but one are still considered well capitalized as per regulatory guidelines, these guidelines don't take asset quality into account. This is why we emphasize an institution's ratio of problem assets to core capital and reserves. Using this measure, there are six institutions that may lack sufficient capital to ride out the storm.

Leading the list is Coast Bank of Florida, a unit of Coast Financial Holdings ( CFHI), with nonperforming loans and repossessed real estate now comprising 11.71% of total assets. The problem loans first came to light in January, and they are mainly construction loans to individuals who contracted to build investment homes with the same failed builder. Coast Bank is considered significantly undercapitalized per regulatory guidelines, and the ratio of nonperforming assets to core capital and reserves is over 135%.

As discussed in our previous piece on problem construction loans, Coast Bank has a merger agreement in place with First Banks, which was approved by shareholders on Nov. 26 and should be completed soon.

Marco Community Bank (held by Marco Community Bancorp ( MCBN)) has seen its loan quality nose dive over the past three quarters. Nonperforming assets now comprise 10.84% of total assets. In its third quarter 10-Q filing with the Securities and Exchange Commission, Marco stated that most of its nonperforming loans consisted of an $11.1 million pool of loans it purchased in bulk. It described them as "short-term loans to borrowers with high credit scores, which were used to finance the borrowers' acquisition and renovation of residential real estate." In other words, investors looking to flip houses.

Regulators forced the bank to reserve $5.8 million for this loan pool. Marco Community has already charged off $3.2 million of loans in the pool, and after reserving an additional $746,000, it expressed confidence that its reserves are now sufficient.

These numbers are staggering for a bank with total assets of just $149 million. Marco Community Bank's September 30 ratio of nonperformers to core capital and reserves was over 85%. The good news is that the Marco Community raised $4.8 million in additional capital this month. All things being equal, this would bring the bank's leverage ratio above 12% and lower the ratio of nonperformers to core can and reserves to 68%. CEO Richard Storm, Jr. stated: "We are very excited about the many opportunities we are now working on."



First Florida Bank's loan quality started spiraling downward a year ago, and bad construction loans increased sharply over the past two quarters. Problem loans and repossessed real estate now comprise 10.55% of total assets. While First Florida remains well capitalized, the ratio of nonperforming assets to core capital and reserves is a scary 95.69%.

Of course, First Florida has a major advantage, being a subsidiary of Synovus Financial ( SNV), a multibank holding company with $33.6 billion in assets spread over 29 subsidiary banks, at last count. The holding company would be expected to recapitalize First Florida if necessary.

Federal Trust Bank of Sanford is held by the thinly traded Federal Trust Corp ( FDT), and it has followed the Florida trend, with a twist. The thrift charged off a total of $5.7 million in problem loans during the third quarter, and it claims that $2.4 million of the losses were caused when a mortgage company and loan servicer, TransLand Financial of Maitland, Fla., failed to remit loan payoffs it had received from borrowers. Federal Trust is seeking to recover its loss as part of a federal lawsuit, but recovery seems unlikely, as the bankrupt TransLand is facing more than 20 other lawsuits.

The thrift's nonperforming assets now comprise 5.82% of total assets, and the key ratio of nonperformers to core capital and reserves is 75.63%.

Coastal Bank of Merritt Island has $150 million in total assets. Nonperforming assets increased over the past two quarters and now total $4.7 million, or 3.79% of total assets. These are mainly single-family mortgages and construction loans. Unlike many other institutions on the list, Coastal Bank has not made significant additions to its loan-loss reserves this year. While this has kept earnings steady, its loan-loss reserves are low. Once again, the ratio of nonperforming assets to core capital and reserves tells the story, with 77.52% exposure to problem assets.

Century Bank FSB of Sarasota is one of the largest institutions on the list, with $903 million in total assets. Over the past few years, Century has been a strong earnings performer, with a return on equity usually exceeding 20%. Over the past three quarters, however, the decline in the thrift's asset quality has accelerated; nonperforming assets now total $28.4 million, nearly double the level last quarter. The bulk of the problem loans are residential mortgages and home-equity loans, with some commercial real estate and land loans.

With loan-loss reserves covering less than 16% of nonperforming loans, the thrift will likely make a large provision for credit losses soon, wiping out earnings for one or more quarters. Overall, Century's ratio of nonperforming assets to core capital and reserves is 73%.

(BankAtlantic does not appear on the table, because its ratio of nonperforming assets to total assets was just 2.49% at Sept. 30, and we limited our search those a ratio of 3% or higher.)

In a weak real estate market, smaller institutions in many key areas of the country face elevated risk of capital to problem loans. The seven banks and thrifts we have focused on are all facing capital shortages unless the real estate market quickly turns around. Depositors need to take note and monitor the health of their institutions, especially if managing accounts for businesses, municipalities such as school districts or other entities.

TheStreet.com's Bank and Thrift Ratings are updated on a quarterly basis and offer a very conservative take on an institution's financial strength.

Ratings lookup tip: With 8,700 banks and thrifts, it can be a bit tricky to find your institution on the Ratings Screener . The easiest way to find an institution is to first click on the Banks and Thrifts in the Screener. Then select the state where your institution is headquartered, enter just the first word of the name, and scroll through the list to find your institution.

As originally published, this story contained two separate errors. Please see Corrections and Clarifications for December, and Corrections and Clarifications for November.

Philip W. van Doorn joined TheStreet.com Ratings., Inc., in February 2007. He is the senior analyst responsible for assigning financial strength ratings to banks and savings and loan institutions. He also comments on industry and regulatory trends. Mr. van Doorn has fifteen years experience, having served as a loan operations officer at Riverside National Bank in Fort Pierce, Florida, and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a Bachelor of Science in business administration from Long Island University.