Bad loans sap banks' profits

Souring loans and a weakening economy are taking an increasingly heavy toll on the nation's banks -- and Minnesota institutions aren't faring much better.

Nationally, earnings for insured banks plunged 94 percent, falling to just $1.7 billion in the third quarter from $28.7 billion a year ago, according to a Tuesday report by the Federal Deposit Insurance Corporation (FDIC). With the country's stack of nonperforming loans mounting, 54 more banks landed on the FDIC's official list of "problem banks," bringing the total to 171 -- the most since 1995.

FDIC Chairman Sheila Bair told reporters Tuesday that the July-September quarter was the second-weakest one for insured banks and savings institutions in nearly 20 years, and she urged patience as the federal government tries to stabilize financial markets.

The FDIC doesn't release the names of problem banks. But the third-quarter snapshot of FDIC insured banks headquartered in Minnesota clearly shows the increasing strain of unraveling credit markets, rising unemployment and skidding real estate values:

• Bank profits in the state dropped nearly 60 percent year-over-year, from $1 billion to $435 million, as many banks made provisions for future loan losses.

• Net charge-offs, the bad loans and leases that Minnesota banks wipe off the books, rose to 0.47 percent of total assets (less proceeds recouped against earlier charge-offs); that's up from 0.17 percent through the third quarter of 2007.

•Bad loans no longer accruing interest -- a sign of trouble down the road -- rose to 1.41 percent of total bank assets, up from 0.63 percent a year ago.

Some banking groups downplayed the lousy news.

Brad Ruiter, spokesman for the Edina-based Minnesota Bankers Association, said the state's insured banks still outperformed the nation on some key measures. They had higher rates of return on both assets and equity, as well as proportionately fewer banks in the red, he said.

'Times are rough'

"Yes, times are tough," Ruiter acknowledged. But in comparison to the rest of the country, he said, Minnesota banks are doing all right. "Not great -- no one really is -- but due to our bankers' high level of management practices in this state, things are OK."

Marshall MacKay, head of the St. Paul-based Independent Community Bankers of Minnesota, called the level of Minnesota's nonperforming loans "a concern, not a catastrophe."

MacKay said he thinks most of the state's bank troubles remain tied to real estate, although he acknowledged concerns that the next wave will move beyond that to other types of loans.

The state's banks have been socked with faltering development and construction loans. A key factor driving the growth in red ink, MacKay said, is that banks are stashing away more money to cover anticipated bad loans, eating into profits.

A challenging question

"In most cases it's going into their loan-loss provisions," MacKay said. "How long will it take to work through those issues? That's the challenging question."

The No. 1 bank in Minnesota for net losses through the third quarter, Inter Savings Bank (InterBank) in Maple Grove, could not be reached for comment.

American Bank in St. Paul, which posted losses through the third quarter of $9.4 million, placed third for net losses. President John Kimball blamed two things: accounting for losses on the bank's preferred stock holdings in the teetering mortgage giants Fannie Mae and Freddie Mac, and a loss of some $6.8 million on its dealings with another mortgage company.

Kimball said many banks held stock in Fannie Mae and Freddie Mac. While the bank is required to adjust the value of such stocks to reflect market realities each month, it's not required to run the value changes through the income statement unless the bank sells the stock or deems it permanently impaired.

"We had a couple of special one-time things that hit us this year," Kimball said. "Our core business is good."