business

Time is running out for two Minnesota banks on life support.

According to the second-quarter bank numbers now rolling in to regulators, Mainstreet Bank in Forest Lake and Brickwell Community Bank in Woodbury have liabilities that exceed their assets. In short, the two banks appear insolvent.

The banks are part of a group of Minnesota lenders hammered by heavy loads of deteriorating commercial real estate loans tied to housing developments, strip malls, hotels and office buildings. With real estate values sliding and a prolonged recession pushing up vacancy rates, such loans have turned toxic for many lenders.

Mainstreet and Brickwell posted Tier 1 capital -- considered the most basic measure of a bank's strength -- of negative $4.9 million and negative $759,000 respectively, according to financial research firm Foresight Analytics in Oakland, Calif. Tier 1 capital is essentially a bank's past profits plus funds raised by issuing shares. Industry consultants say such negative equity is a very rare situation outside a banking crisis.

Negative capital has dragged their crucial capital ratios below zero as well. A bank's Tier 1 capital must be at least 4 percent for a bank to be considered adequately capitalized. Mainstreet and Brickwell had Tier 1 ratios of negative 0.99 percent and negative 0.98 percent, respectively.

Brickwell couldn't be reached Tuesday.

Mainstreet Bank said it was in negotiations with potential investors and couldn't discuss details. The bank had negative equity in the second quarter, said Mainstreet spokeswoman Karen Greisinger, because it moved $10.9 million from equity accounts to bolster its loan loss reserves. Greisinger emphasized the bank has "very strong liquid resources" to serve customers.

"We are negotiating with third parties and hopeful that Mainstreet Bank will be fully recapitalized soon," she said.

Both banks have been operating under cease and desist orders from regulators for several months and are to raise fresh capital and fix their balance sheets. Since both banks are chartered by the state, it's the Minnesota Department of Commerce's call to shut them down, a spokesman for the Federal Deposit Insurance Corp. (FDIC) said.

Commerce officials would not comment on how much more time they were giving the two banks. Negative equity, by itself, isn't cause to automatically revoke a charter, said Commerce spokesman Bill Walsh. But he acknowledged some action was required soon.

The FDIC, charged with protecting the deposit insurance fund, helps drum up prospective buyers and sells bank assets and deposits. It has found buyers for all but about a half dozen of the 97 banks nationally that have failed since the start of the crisis, and is trying to lure private investors into the bank-buying arena. The sales are worked out under a cloak of secrecy and generally not made public until the new owner walks through the failed bank's doors, usually on a Friday evening.

Mainstreet Bank, which had assets of $459 million as of June 30, financed many local home developers, such as Laurent, Wensmann and M.W. Johnson. About a quarter of its total loans in the first quarter were commercial real estate loans in default, according to Foresight Analytics.

Brickwell Community Bank, with assets of about $73 million as of June 30, was also deep into financing commercial real estate. About 7 percent of its total loans in the first quarter were commercial real estate loans in default.

Mainstreet and Brickwell are among a handful of banks nationally now operating with negative equity, said Matt Anderson, a bank analyst and partner at Foresight Analytics. Of the 15 banks that have reported negative Tier 1 capital for the second quarter, 10 have already been shut down, he said.

"It is very rare for negative Tier 1 capital to persist for any amount of time," Anderson said.

BankUnited, the Florida thrift that collapsed in May, operated for some time with negative Tier 1 as the FDIC negotiated with the investor group that took over much of its operations, said Philip van Doorn, senior banking analyst at TheStreet.com. BankUnited is expected to cost the FDIC's insurance fund about $4.9 billion -- the second most expensive seizure since the banking crisis started in 2008. The most expensive was the fall of IndyMac Bank in California last year, which cost the insurance fund about $10.7 billion.

Jennifer Bjorhus • 612-673-4683