business

Federal regulators have ordered Community Resource Bank of Northfield, Minn., to strengthen its loan portfolio and ensure that it has adequate capital.

The 132-year-old bank, which has $240 million in assets, must improve its loan review process and reduce its delinquent loans that have balances exceeding $500,000. The bank also was told to come up with a plan to "maintain sufficient capital." The Jan. 21 agreement between the Federal Reserve Bank of Minneapolis and the Northfield bank was made public Tuesday.

Community Resource's CEO, Don Kuehnast, said the bank ran into problems with business loans backed by real estate in Northfield, Cannon Falls and Roseville, where the bank has offices. However, the bank's capital levels remain strong, he said, and the bank has taken steps to address most of the Federal Reserve's concerns.

"These are loans generated in our immediate markets where businesses are struggling," he said.

Community Resource is the first Minnesota bank hit with an enforcement action this year from federal regulators, who are pressing banks to shore up their finances and clean up loan problems before losses eat away at capital. Minnesota banks have faced about 30 federal enforcement actions since January 2008; only California, Florida, Georgia and Illinois banks have received more, according to Foresight Analytics, a California research firm.

The 15-page agreement between Community Resource and the Federal Reserve is not as severe as a cease-and-desist order or a prompt corrective action, which have been taken against some of this state's weakest banks.

Community Resource lost $938,000 in the third quarter ended Sept. 30, largely because of a $3.7 million expense to increase its reserves against bad loans. The bank's non-accrual loans and leases rose to $5.32 million from $2.34 million a year earlier. The bank's ratio of bad loans to total loans increased to 4.37 percent versus 1.57 percent a year earlier.

But the bank appears to have a healthy cushion to absorb these loan losses. Unlike many banks that have been hit with regulatory actions, Community Resources' equity -- or its cushion against future loan losses -- has improved during the economic downturn. The bank ended the third quarter with $24.45 million in equity, virtually unchanged from a year earlier and up from $23.7 million in September 2007.

Kuehnast, the bank's CEO, said most of the loan problems are confined to commercial real estate, primarily loans to small businesses backed by property they own.

The bank, he added, did not get swept up in the housing boom; construction and development loans represent only a small portion of the bank's overall balance sheet.

"We are moving ahead with our vision intact, our commitment to being a safe and sound bank unchanged, and our spirits high," Kuehnast said.

Chris Serres • 612-673-4308