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Health of banks in Minnesota is improving, but slowly

ST. PAUL — Since 2007, 13 Minnesota banks have failed, however the financial outlook for the banks overall seems to be improving, or at least not getting any worse.

Pinehurst Bank in St. Paul is the latest Minnesota bank to fail. Regulators had repeatedly blasted the bank for bad management, poor lending decisions and other shortcomings, but Pinehurst didn't turn itself around.

Instead, it ran out of money, overwhelmed by commercial real estate loans that had gone bad. On May 21, regulators shut down the bank. They had a buyer lined up, which had just one branch office. Pinehurst closed that Friday and opened the next business day as a branch of Wisconsin-based Coulee Bank.

"It's been kind of a non-event," said Brad Sturm, president of Coulee Bank. "Once we've been able to introduce ourselves, make sure people understand their deposits are fine, they can continue writing checks, they can use their debit cards. "From their standpoint really all that happened is there's a name change. No one is losing any money."

That's the way it's supposed to go when a bank fails. Regulators shut a bank down and it opens the next day under new ownership and management. Depositors' money is safe, as long they're within FDIC insurance limits of $250,000 per account.


In Pinehurst's case, the cost to the FDIC fund was about $6 million. The money comes from assessments on banks, not taxpayers.

S who gets hurt in a bank failure? Former owners, for sure; they typically lose their investment in the bank. Attempts to contact Pinehurst's owners and management were unsuccessful. "Most banks are not in trouble." - Ron Feldman, Minneapolis Federal Reserve Bank

Long-time customer Ted Erickson welcomed the change at Pinehurst.

"I was not worried when I learned it had been taken over by someone else," Erickson said. "I'm happy to hear it's now part of a larger organization. I think that improves the stability."

Minnesota's 400 banks are mostly community-based institutions with less than $100 million in assets. There's not much debate about whether these banks are too big to fail. With the exception of TCF Bank, they're simply not very big.

Banking regulators don't count Wells Fargo or US Bank as "Minnesota" banks. That's because those two national banking giants are chartered in other states.

Bad loans are a big problem for banks in Minnesota and across the country. Over the past three years, Minnesota banks saw their bad loans, meaning loans borrowers aren't making payments on, triple to nearly $1.8 billion.

Ron Feldman is a senior vice president at the Minneapolis Federal Reserve Bank, one of agencies that oversee banks in Minnesota.


"Most banks are not in trouble," Feldman said. "But of the banks that are in trouble what you are seeing in Minnesota are institutions that had a concentration, typically in commercial real estate. And within commercial real estate, typically what is called construction and land development. That's building something from scratch."

In some cases, Minnesota banks got involved in Sun Belt real estate markets when they were hot, and the banks were burned badly when those market collapsed.

The FDIC has 775 banks — about ten percent of the country's banks — on its "problem list." The Minnesota Commerce department uses a more conservative standard for its watch list, and it says a quarter of the state's banks warrant close scrutiny.

Neither agency identifies the banks, but it's not to hard to divine which banks are on the list. Banks must regularly disclose details of their financial performance.

Historically, just between 10 and 15 percent of banks on the FDIC's watch list have failed. Feldman of the Federal Reserve said most banks find a way to put their problems behind them.

"They might merge," Feldman said "Some of them get bought out. Some of them get additional capital. Some of them are just able to work through their problems better than we think. The economy turns up faster. It's not dire for even all the bad banks.

Most Minnesota bankers believe they have stabilized their commercial real estate and other loan portfolios.

Marshall McKay, president of the Independent Community Bankers of Minnesota, said the volume of bad loans isn't growing, for the most part.


"I wouldn't say I'm optimistic, because there's still a great deal of uncertainty in the market" McKay said. "But I am not pessimistic for sure. I believe we are starting to see the beginning of improvement on a lot of different fronts."

Including profits, in the first quarter of this year the number of unprofitable banks fell to 73. That was down from 157 at the end of 2009.

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