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Arizona has Highest Percentage of Undercapitalized Local Banks

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. Since the analysis was run, Summit Bank of Prescott last week became the 14th Arizona bank to fail since 2008. 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. For Arizona, the research indicates that residential real-estate problems have largely moved through the pipeline (at least from the perspective of local banks) but that commercial loans still pose risks. Arizona banks remain heavily exposed to commercial properties that are owned-occupied and those held by investors, Mustafa said.

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