Tough times prod tougher oversight of Minn. banks

Minnesota banks that may have thought they were on sound financial footing could be in for a rude shock.

Federal regulators are starting to impose stricter capital requirements on banks that may have a history of loan problems -- even if those problems appear under control, say bankers and regulatory experts. Some frustrated bankers say the shifting rules have made it harder for them to book new loans and grow their way through the worst economic downturn since the Great Depression.

"It's like beating a dog while it's down," said Matt Anderson, an analyst with Foresight Analytics, a California research firm that tracks and analyzes bank data. "The regulators' actions are not necessarily too late, but they're definitely belated."

This week, federal regulators disclosed enforcement actions against two Minnesota banks -- American Bank of St. Paul, and Americana Community Bank of Sleepy Eye -- that appeared to be on sound financial footing. Both banks were ordered to put away more cash to cover future loan losses, even though their losses had shown signs of abating. The government also ordered the banks to come up with plans to raise their capital levels, even though they were both well above the regulatory minimums.

Adam Dittrich, president and CEO of Americana, which has five branches and $185 million in assets, said he was surprised by the enforcement action, because the bank had already taken steps to correct the loan problems cited in the report.

"We felt we were on top of things," said Dittrich, whose bank was hit with the order in June, though it was made public Friday.

Since early 2008, 18 community banks in this state -- from tiny Paragon Bank of Wells, Minn., to Mainstreet Bank in Woodbury -- have faced similar enforcement from federal regulators, including the Federal Reserve, the Federal Deposit Insurance Corp. and Office of the Comptroller of the Currency. Bankers complain that each regulator has its own standard for what qualifies as a "good" or a "bad" loan, and how much capital or reserves should be kept on hand. And the yardsticks keep changing, which makes it difficult for bankers to know when they might be ordered to increase their capital, curtail lending, replace management or take other steps to satisfy regulators.

"Regulators are probably quicker to pull the trigger in this setting, because they have a lot of people looking over their shoulders at the moment," said Michael Carlson, a partner in the finance and restructuring group at Minneapolis law firm Faegre & Benson. "Congress wants to make sure that regulators are regulating, and this is a reaction to that."

In some cases, bankers say they feel as if they are being pulled in opposing directions. On the one hand, state and federal lawmakers say they ought to loosen their purse strings and lend more in order to stimulate the economy. Yet it becomes harder to maintain minimum capital ratios -- particularly, if they are higher than in the past -- if a bank books more loans, since the ratios are determined as a percentage of a bank's assets. A community bank that books new loans quickly may find itself on the receiving end of an official sanction, bankers argue.

Mixed messages to bankers

"One branch of the federal government may be saying, 'Watch who you lend to,' while the other is saying, 'Come on, lend the money,'" said Brad Ruiter, a spokesman for the Minnesota Bankers Association. "There's a lot of different messages out there."

John Kimball, president of American Bank of St. Paul, said he was not shocked when federal regulators began taking a closer look at his bank. After all, American had a history of overzealous lending to businesses far removed from its 13 branches in the Twin Cities. In 2005, it took a $5 million loss on a loan to jailed Backstreet Boys founder Lou Pearlman after it was discovered that he was running a giant Ponzi scheme. It also lost money on a loan to Centennial Mortgage, a mortgage broker that was shut down by the Minnesota Commerce Department last year for "financial irresponsibility."

But regulators at the Minneapolis Fed, citing economic factors such as the rising unemployment rate and interest rates, insisted that the bank add to its reserves during the first quarter. Kimball complied, but said he was surprised they put so much focus on outside factors.

"I've been at this for 30 years, so I've been through some cycles," Kimball said. "When times are good, regulators are pretty easy on you. It's pretty comfortable. But when times are bad, it just gets tougher."

Banks are also struggling to keep pace with regulators changing capital requirements.

Dittrich said Americana had grown accustomed to keeping its capital levels just above those deemed adequate by the FDIC. In the past, that meant the bank would maintain a total risk-based capital ratio, a key measure of financial strength, of at least 8 percent. However, the FDIC's enforcement action now requires the bank to maintain a total risk-based capital ratio of 11 percent. The owners of Americana have invested an additional $5 million in the bank since the beginning of the year.

"It's creeping up," Dittrich said of the ratio. "We've read a few out-of-state [enforcement actions] that call for a 12 percent ratio. ... We all as an industry have to play by the rules. But in the interim, it's a little confusing."