Bad loans hurting Chicago's Corus

Corus Bankshares Inc., Frontier Financial Corp. and W Holding Co. are among small banks in the U.S. where bad loans have grown larger than reserves, raising the possibility of writedowns, loan limits and a demand for capital that may prompt some to seek buyers.

Reserves fall short of covering nonperforming assets at 110 of 181 small-cap banks and institutions on the Russell 2500 Financial Services Index, according to first-quarter data compiled by Bloomberg. Nonperforming assets are mostly loans 90 days or more overdue.

"The reserve is the first line of defense to preserve losses before you eat into equity," Mark Muth, an analyst for Howe Barnes Hoefer & Arnett, based in Nashville, Tennessee, said in an interview. "It's a sign you might have to raise more capital." Banks that have to raise more money may try to sell themselves, Muth said.

Investors want to see reserves equal to or greater than the value of a bank's troubled assets, said B. Riley & Co.'s Andy Stapp, a Haverford, Pennsylvania-based analyst who's been following the industry for more than 20 years.

The average value of nonperforming assets for banks in the Russell 2500 Financial Services Index is the highest in 20 years, almost doubling to $142.7 million in the first quarter from a year earlier. Average reserves for loan losses increased at a slower pace, 35 percent, to $67.4 million, according to Bloomberg data.

Corus, a Chicago-based bank that financed condominium development in markets hit by overbuilding such as Florida, may sell itself because of an increase in bad loans. The board has hired an unnamed investment bank "to enhance the stability of the company including a capital investment, sale, strategic merger or some form of restructuring," according to a regulatory filing May 1.