It's become a Friday morning tradition: Guess which Minnesota bank will be the next to get hit with a regulatory action?
The bad news tends to occur on Fridays -- and this week was no exception. Two of Minnesota's community banks -- Horizon Bank of Pine City and Paragon Bank of Wells -- were ordered by federal regulators to clean up their lending practices and stop making risky loans. They are among five community banks in the state that have received similar decrees -- known as "cease-and-desist orders" -- since last September, as regulators move to curb the aggressive practices that have left many banks with staggering levels of bad loans.
"Regulators are sending a clear message to banks that you need to watch your business ... and you need to do things differently," said Michael Carlson, a partner in the finance and restructuring group at the Minneapolis law firm of Faegre & Benson. "Everyone is under closer scrutiny."
But the heightened scrutiny likely won't be enough to forestall a disaster among some community banks in this state, according to experts. All told, 65 Minnesota banks and thrifts -- or one out of eight lending institutions in the state -- lost money last year, according to the Federal Deposit Insurance Corp. The ratio of nonperforming assets -- or loans whose payments are more than 90 days past due -- nearly doubled last year to 3.33 percent from 1.76 percent among state-chartered banks in Minnesota, according to the FDIC.
Nationally, the FDIC's list of "problem institutions" has mushroomed to 252 from 76 a year ago. The Minnesota Department of Commerce's separate watch list of troubled banks has increased to 51 institutions from 26 over the past 18 months. Regulators do not release the names of problem banks for fear that depositors will rush to withdraw their money.
The FDIC sent a clear message to the market that it also expects problems to deepen when it announced Friday that it will charge U.S. banks a new, one-time assessment and increase other fees to replenish its insurance fund. The fund, which is used to reimburse customers for deposits of as much as $250,000 when a bank fails, has shrunk by nearly half over the past year as a result of 39 bank failures since the beginning of 2008.
Minnesota fourth in nation
The higher fees, which are projected to generate $27 billion this year, will put added financial pressure on an industry already hobbled by toxic loans, a deepening recession and declining interest income. "There will be a chorus of people out there who will say that the problems we face now were caused by the systemically significant banks, and they should be the ones that pay this -- not everyone," Carlson said.
According to a forecast by Foresight Analytics, a California-based economic and real estate research firm, which creates its own list of problem banks designed to monitor the FDIC's, Minnesota ranks fourth in the nation -- behind Georgia, Florida and Illinois -- with the highest count (14) of problem institutions. Foresight estimates as many as five of these Minnesota banks will fail this year, based on financial data reported to regulators and information from past failures.
Given that stronger banks are unwilling to take on more risk, and that federal assistance is primarily flowing to healthy institutions, many of the banks that are in trouble now will need to raise more capital quickly or face closure, said Matt Anderson, a partner at Foresight Analytics. "It's like that old saying, 'How do you catch a falling knife?'" he said. "You pick it up off the floor."
But state and federal regulators have become increasingly assertive, in the hopes of shoring up bank balance sheets before they enter a downward spiral. Since last fall, Mainstreet Bank of Forest Lake, Lake Country Community Bank of Morristown and BankCherokee of St. Paul received cease-and-desist orders from state or federal regulators and were told to clean up their lending practices. Mainstreet Bank lost $16.4 million last year, the most of any state-chartered commercial bank in the state.
"Our goal is no surprises," said Bill Walsh, a spokesman for the state Commerce Department. "The actions we're taking are a sign that we're aware of the problems. ... and we're on the case."
'Unsafe business practices'
Most recently, the FDIC cited both Horizon Bank and Paragon Bank of operating with inadequate capital and failing to set aside adequate allowances for loan losses, according to separate cease-and-desist orders filed in January but made public Friday. The agency alleged that both banks had engaged in "unsafe or unsound business practices."
The FDIC ordered Paragon Bank, an 84-year-old bank with $34 million in assets as of Dec. 31, to cease paying a cash dividend without the consent of the federal agency. The bank was also ordered to write off all loans classified as "losses" and to cease extending credit to borrowers who have problem loans.
Paragon Bank was also cited for violating a number of bank laws and regulations, including the Federal Reserve's restrictions on loans to executive officers, according to the cease-and-desist order.
"We have been working with our regulators since early last year to make sure that we are on sound financial footing," Paragon chairman and chief executive Pat Hart said in a statement. "We have made necessary adjustments and look forward to serving the community for many years to come."
Meanwhile, Horizon Bank, which had $92.8 million in assets as of Dec. 31, 2008, was accused by the FDIC of "operating with inadequate liquidity in light of the bank's asset and liability mix," and keeping an excessive level of past-due loans on its books. Officials at Horizon Bank did not return repeated calls Friday.
Both banks were ordered to increase their capital ratios and to replenish reserves to cover loan losses.
Chris Serres • 612-673-4308
