Banks in Arizona need cash

According to a new analysis, continuing financial problems could lead to more failures of Arizona-based banks.

Chairman of Invictus Consulting Group Kamal Mustafa said,community banks are still facing enormous pressure.

The specter of rising interest rates, whether from a federal debt default in early August or from other reasons down the road, could trigger new problems for small banks.

Mustafa said,"When interest rates increase, a lot of customers will face a doubling of their interest costs, leading to an increase in the number of defaults,"who indicated he feels higher rates are inevitable.

Among states, Arizona had the highest percentage of undercapitalized local banks at the end of the first quarter, the most recent period for which data are available, after applying a proprietary stress test developed by Invictus.

Specifically, 19 of the 36 banks wouldn't have enough capital to cover 8 percent of their primary or "Tier 1" loans.

Even so, Arizona banks have made progress. Combined, they earned a small profit from January through March after 12 straight money-losing quarters that resulted in nearly $1 billion in losses.

Invictus conducts stress tests on banks using financial statements and other research. It estimates that Arizona's banks would need to raise $140 million to get the entire group above that 8 percent capital level. The firm's focus is on spotting banks with problem loans that haven't surfaced yet, based on the types of loans still on the books and other factors.

The analysis of banks in Arizona excludes Chase, Wells Fargo, Bank of America and most other big banks that operate here but are headquartered elsewhere.

Regardless of bank size, depositors generally are protected by federal insurance at least up to $250,000 per institution.
Unfortunately, many Arizona banks are finding it difficult to raise new capital from investors these days.

Despite an $8.8 billion loss just reported by BofA, big banks generally recover much better than their smaller counterparts because they have more diversified operations, lower cost structures and greater ability to raise capital, Mustafa said.