Though the list of banks in dire straits grows by the day, most are concentrated in formerly frothy areas like the Southeast or California.

Now, it seems, trouble has arrived in the Northeast.

Take the $334 million-asset Butler Bank in Lowell, Mass., which had its Tier 1 capital halved last quarter as its construction loans worsened dramatically, according to its call report.

Now undercapitalized, the unit of Butler Bancorp Inc. has little cushion to absorb more loan losses, and 19.7% of its assets are nonperforming.

The $44.3 million-asset Citizens Community Bank in Ridgewood, N.J., is even worse off. It had negative Tier 1 capital at the end of the first quarter, its call report shows.

John Blaylock, an associate director at Sheshunoff & Co. Investment Banking, said that it is unusual for such problems to crop up in the Northeast but that Butler and Citizens probably are harbingers.

"A lot of institutions in the Northeast are in a lot better condition than those in Florida, California and Georgia. You can look at the numbers. Asset quality is better," Blaylock said. "But problems do exist there, and we are going to see closures in the Northeast. It is just a matter of time."

Damon DelMonte, an analyst at KBW Inc.'s Keefe, Bruyette & Woods Inc., agreed that such significant issues are unusual in a region that has held up well through the recession so far.

Though first-quarter results at companies in New England and the Middle Atlantic region showed deterioration in credit quality, most continued to outperform their counterparts elsewhere in the nation, said DelMonte, who does not cover Butler or Citizens Community.

Butler is a mutual, and Citizens Community is closely held.

Butler lost $2.2 million in the first quarter, according its call report. Its Tier 1 capital dropped dramatically — from $23.2 million at yearend, to $10.9 million as of March 31 — data compiled by the market research firm Foresight Analytics LLC indicated.

The bank's leverage ratio shrank to 3.40%, which regulators consider undercapitalized. (For a bank to be well capitalized, that ratio must be at least 5%, and to be adequately capitalized, it must be at least 4%.)

Janet Bruno, the president and chief executive officer of both Butler Bank and its parent company, said in an interview that "any and all opportunities" to raise capital are being explored.

"We are in overdrive," she said.

Its trouble is concentrated in construction lending. Roughly 36% of Butler's loans were in construction, and at least 49% of the construction loans were classified as nonaccrual. "They have a double strike against them," DelMonte said. "They have a high level of exposure to construction loans, and, of that, they had a high level of nonperformers."

Bruno said builders late on their loan payments and declining property values contributed to the nonaccrual construction loans. They have been piling up for more than a year, reaching $43 million in the first quarter, an increase of 25% from the fourth quarter and 418% from a year earlier.

DelMonte said other construction lenders in the region have not seen similar rapid deterioration. "Based on what we've seen with other New England financial institutions, the pressure in this construction portfolio appears abnormal."

But Randy Dennis, the president of DD&F Consulting Group in Little Rock, said he is not surprised that a bank in the Northeast is having problems with construction loans. "Construction and development is a huge issue everywhere right now," he said.

Citizens Community, which opened in October 2004, has never reported a profitable year and has suffered lately from trouble with residential and commercial mortgages. Executives there did not return a phone call seeking comment by press time Thursday.

But the bank lost $384,000 in the first quarter, according to its call report, and nonperformers made up 19.4% of its assets.

Its Tier 1 capital fell from $118,000 at yearend to a deficit of $601,000 as of March 31, Foresight Analytics data indicated.

As a result, all of its regulatory capital ratios sank to negative levels, with the leverage ratio at minus 1.43%.

The bank has been operating under a cease-and-desist order from the Federal Deposit Insurance Corp. since Sept. 15. It required boosting the leverage ratio to at least 8% within 60 days.

Blaylock said the odds for survival are stacked against both banks, Citizens Community in particular. "The fact that these guys have negative capital, I've got to believe we are going to read about them on a Friday in the not too distant future," he said.

Still, he said he has seen a close call before when an FDIC team arrived in a town ready to close a bank and a buyer made an offer. "I'm never one to say it is too late," he said. "These guys could still make it, but it is not likely. The probability is very, very low."

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.