The financial crisis is far from over for many of Minnesota's smaller community banks.
Three more were ordered by federal regulators to clean up their balance sheets. Each was cited for "hazardous lending and lax collection practices" in cease-and-desist orders issued last month and made public Friday.
Fifteen banks in Minnesota have received cease-and-desist orders from the FDIC or Federal Reserve since early 2008 -- putting the state in the top five for most in the nation.
While most of Minnesota's 322 state-chartered banks are in sound condition, the state Department of Commerce's "watch list" of troubled banks has surged to 57 from just a dozen in 2005. Some people who never thought twice about the safety of their deposits are shifting money to institutions that appear safe.
Though giant banks on Wall Street are getting most of the federal rescue money and much of the scrutiny for their role in creating and investing in mortgaged-backed securities, many smaller banks have gotten into trouble by concentrating on commercial real estate loans -- including loans to developers as well as business loans backed by real estate. Banks are having to write down the value of collateral as property values drop.
All three banks hit with cease-and-desist orders Friday had unusually high concentrations of commercial real estate loans. They include Brickwell Community Bank of Woodbury; State Bank of Aurora in Aurora and the Riverbank of Wyoming. The FDIC ordered all three to increase their capital and develop written plans within 60 days to reduce their concentration of assets. The banks consented to the actions.
A cease-and-desist order usually spells out a series of corrective measures and is a common enforcement action of regulators. It does not mean a bank is in danger or its deposits aren't safe.
"As with most community banks, we did not participate in subprime lending, but that doesn't mean we're not affected by it," said Craig Danielson, chief executive officer of Riverbank, with five branches and $485 million in assets. "When the housing stopped, land development loans were hit hard in that sector of the economy."
The FDIC had the toughest words for tiny Brickwell Community, an $80 million bank that has one of the highest concentrations of commercial real estate loans in the state. Brickwell opened its doors in 2004 when community banks were sprouting all over the state.
The Woodbury bank was cited by the FDIC for operating with a board of directors that "failed to provide adequate supervision," as well as failing to obtain adequate collateral on loans and extending credit with "inadequate diversification of risk."
Brickwell has largely stayed away from construction and development loans, but the bank was affected by the real estate downturn because it specialized in making business loans secured by real estate. As of Dec. 31, the bank's noncurrent loans and foreclosed real estate made up about 13 percent of its total loans -- more than four times that of its peers, according to FDIC data.
Brickwell has never posted a profit. Ivar Peterson, president and CEO of Brickwell, did not return telephone calls Friday.
In a statement, State Bank of Aurora said its "directors and bank management have been proactive in addressing and working towards solutions of the issues we are faced with."
Though Minnesota hasn't had a bank failure since First Integrity of Staples was shut down a year ago, bank closings continue to mount nationally.
Friday, the FDIC closed four more banks, bringing to 29 the number of failures this year. In most cases, the banks are taken over by regulators or larger institutions and depositors are unaffected. Friday, Minneapolis-based U.S. Bancorp assumed $374 million in deposits of an Idaho bank.
Chris Serres • 612-673-4308