Analysts warn bank failures loom in Minnesota

Minnesota's banks are straining under the weight of bad loans and dwindling reserves. Some of them, analysts say, may not last the year.

By CHRIS SERRES, Star Tribune

Minnesota banks have yet to pull themselves out of a downward spiral of loan losses, according to financial results released Wednesday by the federal government. And unless the economy rebounds soon, analysts warn that some institutions in this state won't survive the year.

The 429 insured banks with headquarters in Minnesota are still profitable, but their overall credit outlook has grown increasingly bleak as consumers and businesses fall behind on their loans and banks' cash cushion to cover losses dwindles.

Profits for Minnesota banks plunged 65 percent to just $101.4 million in the first quarter from $292.3 million a year ago, according to a Wednesday report by the Federal Deposit Insurance Corp. (FDIC). Statewide, one of six banks lost money in the first quarter -- up from one in 10 just a year ago.

In the Twin Cities, where loan losses have been the most severe, nearly one of three banks is losing money, according to the FDIC.

Industry observers say it's now a near-certainty that one or more Minnesota banks will be shut down by year's end. A string of bank failures in the state could force regulators to tighten lending rules and capital requirements, resulting in fewer loans at a time when the economy most needs them. Available credit, whether to start a business or buy a home, is seen as a key factor in the country's economic recovery.

"Conditions could improve, but with these trends, a bank closing seems inevitable," said Robert Viering, principal of River Point Group, a bank consulting firm in Monticello.

In Minnesota, concern is centered on dozens of small, community banks -- most with assets of less than $1 billion -- that grew frantically earlier this decade by making loans to real estate developers and builders. Many of their loans were based on overly optimistic assumptions of future home sales and land values.

Once the build-out of new subdivisions screeched to a halt, many developers and contractors -- already heavily in debt -- simply stopped paying their bankers.

The result has been a rapid deterioration in bank balance sheets and heightened scrutiny by government regulators. Since early 2008, about 15 banks in Minnesota have been ordered by federal regulators to clean up their lending practices.

At least two institutions -- Horizon Bank of Pine City and Brickwell Community Bank of Woodbury -- have seen capital ratios fall below minimum levels set by federal regulators; a handful of others, including Mainstreet Bank of Forest Lake, are precariously close to falling below capital minimums.

Though most Minnesota banks have strong capital positions, some industry observers argue that's partly because banks here have been slow to write off loans in default as uncollectible.

"It's clear that some banks in Minnesota are waiting and hoping for conditions to improve," said Matt Anderson, an analyst with California research firm Foresight Analytics. "But the hole for some of these banks is so large that it's difficult to see how they will pull themselves out and get back on track."

All told, 36 federally insured institutions have failed or been shut down this year, compared with 25 in 2008 and three in 2007. The FDIC's list of troubled banks has jumped to 305 -- the highest number since 1994 during the savings and loan debacle -- from 252 in the fourth quarter. The FDIC believes U.S. bank failures will cost the deposit insurance fund about $70 billion through 2013.

Congress last week more than tripled the amount the FDIC could borrow from the U.S. Treasury if needed to restore the fund, to $100 billion from $30 billion.

Though Minnesota has not had a bank failure since last May -- when First Integrity Bank of Staples was shut down by federal regulators -- there are concerns banks in this state have not done enough to shore up their reserves to prepare for a severe economic downturn.

Indeed, banks in Minnesota have been setting aside far less money in their loan-loss reserves to cover losses than their national counterparts, which could haunt the banks later in the year if the recession deepens, analysts warned. Minnesota banks held enough money in reserve to cover 50.5 percent of troubled loans as of March 31, compared with 72.3 percent a year ago and 105 percent in 2007, according to the FDIC. Nationally, such reserves account for 66.5 percent of troubled loans.

Many of these troubled loans are unlikely to be repaid, Viering warned, even if the economy stabilizes.

At Mainstreet Bank, nearly 27 percent of the bank's total book of loans is classified as "noncurrent," 90 days or more past due, according to the FDIC. That's the highest in the state. A key measure of the bank's ability to withstand future loan losses -- its so-called Tier 1 capital ratio -- was just 4.1 percent as of March 31. A bank must maintain a Tier 1 ratio of at least 4 percent to be considered adequately capitalized.

Mainstreet Bank, which has assets of about $500 million and nine branches in the metro area, has lost a total of $41.8 million over the past four quarters, including $6.6 million in the first quarter ended March 31. In February, the FDIC issued a cease and desist order against Mainstreet, alleging the bank operated with an excessive level of delinquent loans and did not keep an adequate amount of reserves to cover loan losses.

Another institution straining under the pressure of souring loans is Interbank fsb of Maple Grove. The bank lost $4.4 million in the first quarter after losing $23.4 million in 2008. Its Tier 1 capital ratio has fallen from 9.1 percent a year ago to 7.5 percent. Interbank, a savings and loan with $840 million in assets, attempted to access a piece of the federal bailout program last fall by selling itself to an insurance company; but the deal fell through.

Chris Serres • 612-673-4308


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