Nearly one quarter of Minnesota banks lost money in the second quarter as they battled rising loan defaults in the longest recession since World War II.

There are now about 102 banks in the state operating in the red, up from 76 in the first quarter and 74 a year ago, according to quarterly financial results the federal government released Thursday. Nationally, 28 percent of banks were unprofitable.

Analysts have been anticipating a string of bank failures in Minnesota over the next few years, and Thursday's grim report did little to change that. Bank authorities have seized two banks in the state since the start of the financial crisis.

Profits for about 426 banks headquartered in the state plunged more than 60 percent to $52.1 million in the second quarter, down from $142.6 million a year ago, according to the Federal Deposit Insurance Corp. (FDIC) report. A good portion of the losses stem from banks shifting money to their reserves to cushion against losses on bad loans. Banks beefed up provisions for loan losses to $221.8 million, up 62 percent from a year earlier and up 30 percent from the first quarter. Total interest income, which reflects the bank's main loan business, was relatively flat from the first quarter and down about 4 percent from a year ago.

Not all the news was bad. Minnesota's performance still beat the nation's. Nationally, the industry lost $3.7 billion in the second quarter. And Minnesota banks increased lending in both the first and second quarters, which will help the recovery, said Joe Witt, president of the Minnesota Bankers Association.

"Unfortunately, the banks are reflecting the current difficult economy," Witt said. "Some businesses and customers are not repaying their loans, which leads to losses for the banks."

Minnesota bankers got more aggressive in writing off souring loans as not collectable. They charged off $207 million in loans in the second quarter -- the highest quarterly total in years, and more than double the $92.4 million they charged off a year ago. Charge-offs come out of a bank's reserves for loan losses.

Despite beefing up the reserve funds, the overall loan-loss cushion in Minnesota still looks relatively thin and may not be enough should the anticipated economic recovery backslide. The increased loan loss reserves still cover only about half the troubled loans the state's banks are holding, down from covering about 62 percent last year, according to the FDIC.

Jennifer Bjorhus • 612-673-4683