business

Financial results from the third quarter show that the nation's banks are "turning the corner toward recovery," but officials at the Federal Deposit Insurance Corp. cautioned Tuesday that it's too soon to celebrate as more bank failures undoubtedly lie ahead.

The FDIC's quarterly report showed that bigger banks are leading the way out of the crisis, but smaller banks -- like those dominating in Minnesota -- have a ways to go.

"The industry continues making progress in recovering from the financial crisis. Credit performance has been improving, and we remain cautiously optimistic about the outlook," FDIC chairwoman Sheila Bair said in a press briefing.

Banks and savings institutions insured by the FDIC reported profits of $14.5 billion in the third quarter, up from just $2 billion a year earlier. It was the fifth quarter in a row that earnings showed a year-over-year increase.

"Lower provisions for loan losses are driving bank earnings by allowing a larger share of the revenue to reach the bottom line," Bair said. "It is important to keep in mind that while most of the industry is on a recovery track, some institutions continue to experience distress."

Nationally, nearly 19 percent of the banks lost money in the third quarter and 36 percent had lower year-over-year earnings.

Bair said 149 institutions had failed this year as of Friday, already ahead of the 2009 total of 140. She said the FDIC expects fewer banks to fail next year.

Nearly 21 percent of Minnesota's banks lost money in the third quarter. That's a slight improvement over the second quarter's figure of 21.7 percent, and a significant improvement over the third quarter in 2009, when 23.5 percent of state's banks were bleeding red ink.

Minnesota's 405 banks reported net income of $186 million in the quarter, a 35 percent improvement over the same period in 2009, when there were 421 FDIC-insured institutions in the state. That's a far cry from the pre-crisis earnings in the third quarter of 2008, though, when 433 Minnesota banks reported profits of $433 million.

Three Minnesota banks slipped from a status of "adequately capitalized" to "undercapitalized" since the second quarter, according to FDIC performance criteria. Northern Star Bank of Mankato slipped into that category from its previous status as "well capitalized." An undercapitalized bank must file capital restoration plans and is subject to restrictions on dividends and management fees.

Three Minnesota banks remain listed as "significantly undercapitalized," including Maple Grove-based Interbank, which ranks 12th in the state by assets with $633.9 million. Such banks are barred from paying bonuses and raises to senior executives without the FDIC's approval and may be subject to other sanctions.

The Minnesota Department of Commerce said about one in three banks in the state are now on its "watch" list.

Bair said the FDIC expects to have enough money to weather the banking crisis. "The industry has come a long way in cleaning up balance sheets, building capital and adjusting to changes in financial markets," she said.

But she cautioned that "the adjustments are not over and this is no time for complacency. Conservation of capital remains a priority given continued uncertainties, particularly in the housing market."

Dan Browning • 612-673-4493