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Southern Arizona's community banks and credit unions are poised to weather the deepening financial storm.

But some have been hit hard by the economic downturn, taking losses while working out bad loans.

Several prominent Tucson credit unions have taken losses this year as loan delinquencies — particularly for autos and credit cards — have risen sharply, according to a recent report based on second-quarter figures. The report was compiled by BauerFinancial, based in Coral Gables, Fla., which rates banks and credit unions for consumers.

The report also shows that, in the second quarter, Tucson-based National Bank of Arizona was saddled with a high level of delinquencies, which the bank blames on development loans. But many in the banking industry have said National Bank of Arizona, which will be receiving U.S. Treasury Department funds and recently raised substantial capital, is in excellent shape.

The report also rated four Arizona-based banks as "problematic" and one as "troubled." Two credit unions were rated as "problematic" and one received no stars, Bauer's lowest rating. All of those institutions are based in Phoenix and many have been struggling with losses for the year or with high numbers of loan delinquencies.

"It's an indication of stress in the banking system, and it indicates that there is a larger chance that banks will either be acquired by someone else or go out of business," University of Arizona economist Marshall Vest said. "It's all part of the consolidation that we are seeing. Smaller banks don't have as many sources for raising funds that larger banks do."

The BauerFinancial ratings are based on quarterly reports that banks and credit unions file with regulators outlining levels of capital, delinquencies and profits, among other information. All of the banks are backed by the Federal Deposit Insurance Corporation, which means individual deposits of up to $250,000 are covered by insurance.

Consumers can use the ratings to follow trends for their financial institutions, said Karen Dorway, president and director of research for BauerFinancial. A bank or credit union showing losses for the year or a high number of delinquencies may tighten lending practices or could limit growth, she said.

"I think it is something that consumers are wise to educate themselves (about), but they are also wise not to go into a panic over the situation," Dorway said.

Delinquent auto loans

Several of Tucson's largest credit unions have taken losses this year as the housing market's decline has seeped into other parts of the economy, particularly auto loans, the traditional bread and butter for credit unions.

"We have taken some lumps this year," said Joe Mirachi, president and CEO of Tucson Old Pueblo Credit Union. "We have taken some losses in the auto portfolio."

Although Tucson Old Pueblo Credit Union retained its Bauer rating of excellent, or four stars, it had lost $634,000 this year through the end of June, the Bauer report shows.

Mirachi, who recently joined Tucson Old Pueblo, said the vast majority of the credit union's loans, about 69 percent, were for autos. The balance were for first and second mortgages, but Tucson Old Pueblo Credit Union has steered clear of subprime lending, he said.

In response to the losses, the credit union has tightened its lending practices and plans to expand residential mortgage lending, he said.

Tucson Federal Credit Union has also seen losses largely due to delinquent auto loans. In the second quarter, the credit union lost $371,000, dropping its Bauer rating from superior, or five stars, to excellent.

"What prompted the losses can be tied in an indirect way to what is going on in the economy," said Matthew Gaspari, chief operating officer for Tucson Federal Credit Union. "What we have seen is not real estate losses at all, but an extension of that in vehicle and credit-card debt."

Return to profitability

But the losses were expected, Gaspari said, and have been buffered in the third quarter by membership growth and a return to profitability.

The numbers are more troubling in Phoenix.

Phoenix-based Arizona Federal Credit Union, which has a number of branches in the Phoenix metropolitan area and a small presence in Tucson, had year-to-date losses of a little more than $42 million through the end of June, according to Bauer. And its loans that were delinquent for more than 90 days made up about 2.7 percent of its total assets.

Officials with Arizona Federal Credit Union declined to comment on the figures.

"One percent is kind of the industry standard benchmark, but realistically when we are going through economic times such as this, anything under two percent is not bad," Bauer's Dorway said.

Having delinquencies higher than that cuts into a financial institution's ability to pursue growth and provide loans, she said.

In the Bauer ratings, Arizona Federal Credit Union dropped from "excellent" to "problematic."

Chicanos Por La Causa Federal Credit Union in Phoenix also showed losses for the year and the number of delinquent loans at about 6.5 percent.

Its rating tumbled from "excellent" — four stars — to no stars, the worst possible rating. No one with the credit union responded to numerous interview requests.

Smaller community banks in the Phoenix metro area also showed a high number of delinquencies. For example, about 14 percent of Mesa Bank's assets were more than 90 days past due. Desert Hills Bank and Towne Bank of Arizona had delinquencies of about 8 percent.

Capital is king

None of the Tucson area's community banks or credit unions had delinquency rates anywhere near some of the hardest-hit Phoenix institutions. Almost all of Tucson's community banks had delinquency rates of less than 1 percent.

The one exception was National Bank of Arizona, which showed delinquencies of about 3.7 percent.

"We do have some development loans, some subdivision loans" that are delinquent, said Dave Lyons, National Bank of Arizona's regional president. "People aren't buying residential lots at this point."

But Lyons said his bank has been particularly aggressive in identifying troubled loans over the last 18 months. So, while the number of delinquencies might be higher than other community banks', the figure also might be more accurate.

"I think we have been very aggressive in going through our loan portfolios," Lyons said.

He didn't put much stock in the Bauer ratings, which rated National Bank of Arizona as "adequate," or three stars.

The true measure of his bank's health is its capitalization and ability to expand lending, he said.

National Bank of Arizona will receive some portion of $1.4 billion in Treasury Department funds that its parent company, Salt Lake City-based Zions Bancorp., is set to receive. The Treasury Department is specifically targeting healthy banks in an effort to jump-start lending.

"I can tell you today the key word in this whole business now is capital," Lyons said. "When you look at the banks that have gotten money, they are typically the healthy, well-managed banks."

Steve Fell, regional president for JPMorgan Chase, said a rating of three stars for National Bank of Arizona makes no sense, considering its overall health.

"We are in a capital game now," he said. "People should take those rankings with a grain of salt. It's just one item in a whole bunch of items that you need to consider in looking for a bank."

It's much more important to know if a bank has sufficient capital to make loans, cover any losses or if it will be forced to tighten lending standards, Fell said. He said one bank might seem healthy, but have a number of problem loans on the horizon. Meanwhile, another bank may be in the process of addressing its problem loans, and as such might have poor quarterly numbers.

"It doesn't mean that a bank is necessarily in trouble, but it's just a red flag that should make the consumer dig a little deeper."