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Three years after the credit crunch began, it’s unclear whether Minnesota banks have hit bottom.

Nearly one in four Minnesota banks is losing money, and losses on bad loans continue to rise, even as some indicators, such as capital levels and overall profits, have shown signs of recovering.

On Tuesday, the Federal Deposit Insurance Corp. reported that Minnesota’s banks earned $54.7 million in the second quarter, down from the first quarter but nearly five times what they earned a year ago. While loan losses have stabilized, they inched up in the second quarter and remain stubbornly high.

Taken together, analysts say, the figures are an indication that it may take longer than previously thought for Minnesota’s banks to recover from the worst economic downturn since the Great Depression. In the Twin Cities, where loan losses have been the most severe, a remarkable 42 percent of banks are losing money, according to the FDIC.

“There is still a threshold of pain remaining,” said Paul Jacques, a former bank executive from Burnsville who does some consulting work for banks. “Even now, some banks are still in the process of identifying their weaker loans. I don’t think the full impact of this cycle has taken place yet.”

The mixed results are bad news for borrowers. Banks that are still working troubled loans off their books likely will have to keep tightening terms on new loans until their loan problems are resolved, bankers said. The banking sector has already shrunk considerably since the economic downturn began. As a whole, assets held by Minnesota banks have fallen 20 percent from $77 billion two years ago to $61 billion.

Instead of loan growth, analysts predict more consolidation. Larger, healthier banks are likely to start buying weaker ones that may be struggling to raise capital, or who may be facing tighter regulatory scrutiny. The Minnesota Commerce Department, which regulates this state’s 406 banks, said Tuesday that its watch list of banks it considers in less-than-satisfactory condition has grown to 106 institutions, up from 50 in June 2009.

Nationwide, banks made $21.6 billion in the second quarter, dramatically improved from a year-ago loss of $4.4 billion. It was the strongest quarter for the nation’s 7,830 banks since the start of the financial crisis in the fall of 2007.

A slow recovery

However, the nation’s banking sector reflects the wider economy, which is undergoing an unusually slow recovery. Falling property values, persistently high unemployment and a reluctance by companies to spend have made it difficult for banks to grow. Total assets in the banking sector declined in the second quarter by 1 percent, the fifth decline in the past six quarters.

The rash of bank failures that began two years ago is unlikely to abate anytime soon, analysts said. The FDIC’s official list of “problem banks” grew to 829 institutions from 775 in the previous quarter. So far this year, 118 banks have failed, including seven in Minnesota. At this point last year, just 84 banks had failed nationally.

Foresight Analytics, a financial research firm in Oakland, Calif., forecasts 200 bank failures this year, up from 140 last year and just 25 in 2008.

“Without question, the industry still faces challenges,” FDIC Chairwoman Sheila Bair said in a written statement Tuesday. She said earnings remain low by historical standards, while problem banks and failures remain high. “Particularly given economic uncertainties, we believe all banks should continue to exercise caution and maintain strong reserves,” Bair said.

Though banks are generating stronger overall profits, much of the increase has come from a shift in how they account for loan losses, rather than organic loan growth. Large banks are setting aside less in reserves to cover loan losses than they did a year ago. That has bolstered their profits but not necessarily resulted in more loans for businesses and consumers. Nationwide, total loan-loss reserves among banks declined 4.5 percent, the first such decline since the fourth quarter of 2006, the FDIC said.

In Minnesota, banks are still not setting aside nearly as much money to cover future loan losses as the banking industry as a whole. That leaves them with less of a cushion if economic conditions deteriorate. Minnesota bank reserves as a percentage of noncurrent loans was 55 percent as of June 30, which means that for every $1 in troubled loans the banks have set aside 55 cents. Nationwide, the ratio stands at 65 cents.

That could pose a problem at a time when delinquency rates on many loans remain stubbornly high. At least 13 banks in Minnesota have noncurrent loans that exceed 10 percent of their assets, which is considered precariously high.

David Reiling, chief executive at Sunrise Community Banks, which owns three community banks in the Twin Cities, said he expects Minnesota banks to continue shrinking as they work more troubled loans off their books.

“We’re jigging along the bottom,” he said of Minnesota banks. “But at least we’re actually hitting something and not going into a free fall.”