Federal regulators continue to turn up the heat on Minnesota banks that are carrying large amounts of distressed loans on their books.
In an unusual move, the Federal Reserve Bank of Minneapolis issued enforcement actions against three Minnesota bank holding companies with subsidiaries that posted big losses last year while their capital levels declined.
The companies hit with the actions include St. Paul-based BancMidwest Corp., the parent of Forest Lake-based Mainstreet Bank and White Rock Bank of Cannon Falls; Spring Grove Investments Inc., which owns Jennings State Bank in Spring Grove, and Pine City Bancorporation Inc., which owns Horizon Bank in Pine City.
The three companies now will operate under much tighter regulatory scrutiny. Under written agreements signed last week but made public Tuesday, they must obtain Federal Reserve approval before they pay dividends, incur more debt or redeem any shares of their stock. One company, BancMidwest, was ordered to submit a plan for increasing its capital.
Taken together, the actions indicate that the Minneapolis Fed is taking a more watchful approach with Minnesota community banks, say industry experts.
"It's certainly attention-grabbing to see three [enforcement actions] all at once -- in one state," said Matt Anderson, a partner with Foresight Analytics, a California-based economic research firm that tracks problem banks. "It's a function of the Fed highlighting what they see as similar issues in various banks in one place at one time."
All the banks except White Rock posted losses in 2008, largely because of real estate loans that have turned sour. Mainstreet Bank last year incurred a $16.4 million loss -- the largest of any state-chartered institution in Minnesota. Horizon Bank lost $3 million and Jennings State lost $1.25 million, according to data provided to the Federal Deposit Insurance Corp.
Those banks had unusually high amounts of overdue loans relative to their assets. As of Dec. 31, Mainstreet's noncurrent loans to total loans were 21 percent, while Horizon Bank was at 13 percent and Jennings State Bank was at 12.2 percent, according to the Federal Deposit Insurance Corp. (FDIC). In Minnesota, the average ratio of noncurrent loans to assets for banks of a similar size was 3.1 percent as of the end of last year.
In many cases, a bank's ability to absorb such losses is a function of its size. With assets of just $51 million as of Dec. 31, Jennings State Bank is the smallest of the banks affected by the enforcement actions.
Uncertain road ahead
Steve Jennings, part owner and chief financial officer, sounded unsure Tuesday about Jennings State's ability to weather the economic downturn. "We don't know what's ahead," he said. "If the recession continues for years, there's a point where you can't survive the stresses."
When asked if Jennings State might be forced to shut down or sell itself, he said: "We believe that we'll survive. But who knows what formula the Fed uses on closures? It's not anything that we have control over."
At Mainstreet and Horizon banks, however, the Fed's regulatory actions came as less of a surprise. That's because both received cease-and-desist orders last month from another federal bank regulator -- the FDIC. Under those orders, both banks were ordered to clean up their lending practices, increase their capital ratios and replenish their reserves to cover loan losses.
Karen Greisenger, a spokeswoman for Mainstreet Bank, said the bank got into trouble by making too many residential real estate loans -- to homeowners and developers -- that now are delinquent. However, the bank has been selling off much of the real estate held as collateral to generate cash and has developed a three-year plan to raise more capital.
Mainstreet should be profitable by the end of the third quarter, she said. "We're making headway," she said. "We have all the pieces in place to turn the corner by midyear."
Horizon Bank, which had $92.8 million in assets as of Dec. 31, did not return a telephone call Tuesday. In the cease-and-desist order issued last month, the bank was accused by the FDIC of "operating with inadequate liquidity in light of the bank's asset and liability mix," and keeping an excessive level of past-due loans on its books.
Chris Serres • 612-673-4308