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1:10 A.M. — Bad debt continues to pile up at most Southwest Florida banks, even as failures, mergers and acquisitions reshape the banking landscape.

Banks based in Lee and Collier counties reported almost $736 million in bad debt tied to real estate as of Sept. 30, up more than 75 percent from debt that was already soaring a year ago.

The debt, a "non-performing asset," increases as borrowers default on loans and property falls into a flooded foreclosure market.

Customers' deposits in failed banks are protected up to $250,000 by the Federal Deposit Insurance Corp., but bank failures have caused lines of credit to be canceled and other accounts to be closed. In addition, debt has caused banks to tighten lending practices.

"Southwest Florida and Southeast Florida have been experiencing some tremendous increases in non-performing assets," said Karen Dorway, president of Fort Lauderdale-based BauerFinancial, which tracks banking information nationwide.

In good times, she said, it's considered acceptable for bad debt to be 1 percent or less of a bank's total assets. In a rough economic climate such as the present, however, "2 or 3 percent wouldn't be surprising."

Now, Dorway said, she's often seeing debt ratios "in the double digits" because there's so much bad real estate debt in this area.

Naples-based Orion Bank, for example, carried about $277.2 million in non-performing debt as of Sept. 30. That is about 9.6 percent of reported assets of $2.7 billion.

Spokesman Frank Knautz said Orion "has been aggressively building the loan loss reserve and writing down loans over the past 24 months," including creating an allowance for loan losses of $92 million.

Fed: Stop it

Orion has been under cease-and-desist orders from the Federal Reserve since Aug. 29, 2008. The orders are among the stronger tools used by the Fed to deal with problem banks.

Fed officials ordered the bank not to give credit to "doubtful" borrowers, improve standards for renewing, extending or modifying existing loans, and hire a consultant to determine whether Orion's senior executive officers are competent to perform their jobs.

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Knautz would not comment on progress under the order, but said the bank is looking to raise capital.

Bank of Florida Corp., a bank holding company that operates Bank of Florida-Southwest here, announced this week plans to offer shares of stock for sale to raise $71 million to capitalize its banks.

"We are just going to keep slugging away and raising capital because that is the prudent thing to do in this environment," said Chief Executive Officer Michael McMullan.

Three locally based banks have failed this year: Riverside Bank of the Gulf Coast (Cape Coral) in February and Hillcrest Bank and Partners Bank (Naples) in October. Naples-based TIB Bank picked up Riverside's assets and Fort Lauderdale-based Stonegate Bank picked up the assets of both Hillcrest and Partners.

Strong will survive

The turnover hasn't been limited to local banks. Colonial Bank, which was based in Montgomery, Ala., with a big presence in Lee and Collier counties, fell in August and the assets were picked up by BB&T, of Winston-Salem, N.C. This week, BB&T made another push into Southwest Florida by acquiring the Oswald Trippe and Co. insurance agency.

Debt levels aren't expected to improve soon because overall economic conditions remain weak.

"I would not be surprised to see the debt in the market to continue to increase as we move into the fourth quarter," said Bruce Schultz, president of Southwest Capital Bank, based in Fort Myers.

Southwest Capital pared its non-performing debt down from a year ago. Schultz said the local market will be shaped for years to come by the debt situation.

"The institutions that are the strongest will survive and you will see better opportunities for those when the market turns around," Schultz said.

David C. Hall, president of First Community Bank of Southwest Florida, said he hopes winter residents will bring business with them as they return to Southwest Florida.

"I think we are all working hard and our customers are being challenged by the economy," Hall said.

The pipeline of new troubled debt is slowing now, Hall said.

Caution

Gary Tice, president and CEO of First National Bank of the Gulf Coast, said this is a challenging time to be lending money in Southwest Florida.

First National, the result of a merger of a newly organized bank and Panther Community Bank, opened last month.

Tice said the problem is not getting people to deposit money in the bank. The hard part these days, he said, is finding borrowers who are in good enough shape financially to be a good risk.

"It doesn't mean we're not doing business, just that we're a little more cautious in our decision making than what was happening in the past," he said. "You really have to take a conservative approach."

A majority of First National's loans are to businesses, he said, and "their revenues are down. And when their revenues are down it affects their cash flow. It makes it a little bit more difficult" to justify making a loan.

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