The New York Times reports the problems for small banks were exacerbated by the nature of deposits they took on in good times. Instead of relying on local deposits, small banks turned to billions of dollars in deposits from nationwide brokers. The banks paid higher rates on the deposits, driving them to make riskier loans that would bring higher returns.

It worked in good times, but then the housing and credit markets crashed.

In June, Standard & Poor’s cut the credit ratings on 18 mostly regional banks. They cut five to junk status. The cuts anticipate new waves of losses on construction loans and commercial real estate mortgages.

The biggest banks to see their ratings cut were BB&T, Capital One Financial, Regions Financial, and Wells Fargo & Co.

But regional banks—including Associated Banc Corp., Astoria Financial Corp., Carolina First Bank, Citizens Republic Bancorp, Comerica, Fifth Third Bancorp, Huntington Bancshares, KeyCorp, Susquehanna Bancshares, Synovus Financial, U.S. Bancorp, Webster Financial, Whitney Holding, and Wilmington Trust—also were cut.

The ratings of Carolina First Bank, Citizens Republic Bancorp, Huntington Bancshares, Synovus Financial, and Whitney Holding were cut to junk status from investment-grade levels.

“Fundamentally, we reassessed the industry risk,” said Tanya Azarchs of Standard & Poor’s. And the rating agency found banking riskier for a bevy of reasons. Among them: More commercial loans will go bad as the recession lingers and the capital markets for banks are expected to remain volatile. “There’s really no place to hide. They’re all vulnerable,” she said. “All of it, it leads to great uncertainty for the next couple of years.”

Synovus Financial, one of the banks downgraded by S&P, provides a case study in how the industry got into trouble and how it may get out. The Columbus, Georgia, bank is concentrated in one of the boom-and-bust regions, with a footprint in Georgia, Florida, South Carolina, and Tennessee. And it went heavily into financing residential development, said CEO Richard Anthony.

When those loans were good, times were very good at Synovus. But then they started to go bad, and the bank is still trying to work its way through them.

“It’s that residential sliver that we’re having to work through now, and it’s certainly been tough,” Anthony said. But he added that “There are encouraging trends, despite the credit costs that have caused losses for Synovus. It continues to come down. Every month and every quarter, that continues to come down.”

Some houses are starting to sell in Atlanta, allowing Synovus to move bad loans off its books. And when the residential crisis has passed, Anthony said, his bank would be more well balanced, with loans to small business making up a larger portion, and residential a smaller portion, of its balance sheet.

Still, the bank posted a net loss of $586.9 million, or $1.82 a share, for the second quarter of 2009, compared to net income of $12.1 million, or 4 cents a share, for the same period a year ago, pointing to how long and hard the road to recovery may be.