Minnesota banks find good news in quarter

The U.S. banking industry produced its highest profits in two years in the first quarter amid growing signs that the financial crisis may have peaked. But Minnesota banks appear to be lagging behind.

The Federal Deposit Insurance Corp. cautioned when it released the figures Thursday that not all banks are created equal. The largest banks, buoyed by government aid, have an advantage over smaller institutions, FDIC Chairman Sheila Bair said.

In addition, smaller banks tend to have relatively higher concentrations of commercial real estate and construction loans, which headed south later than residential mortgages and will continue to threaten some of the weaker institutions that hold them, Bair and her staff said during a webcast from Washington.

The FDIC now has fewer than 8,000 insured banks -- the lowest number since it was founded in 1933. Bair said she expects this year's number of bank failures to exceed the 140 recorded last year. Foresight Analytics, an industry research firm based in Oakland, Calif., predicts 204 failures this year.

Minnesota, which has a relatively large share of small banks, ranks near the top of Foresight Analytics' list of expected bank failures. So far, five Minnesota banks have failed in 2010, bringing the state's total to 12 since September 2007, when the banking crisis began. Foresight Analytics predicts three more banks will fail here by the end of the year.

As of March 31 this year, 411 banks were operating in Minnesota; one of those has since failed. That's down, as a result of both failures and mergers, from 430 banks in the first quarter of last year.

Bair cited some "encouraging signs" in the industry's first quarter numbers that indicate banks may be climbing out of the tank. More than half of all institutions, 52.2 percent, reported year-over-year improvements in their quarterly net income. And just 18.7 percent of the nation's banks reported net losses for the quarter, down from 22.3 percent a year earlier.

But just 42 percent of Minnesota's banks showed year-over-year growth in net income. And the share reporting net losses -- 18.2 percent -- worsened from the 17.7 percent reporting losses in the first quarter of 2009.

Matthew Anderson, a partner in Foresight Analytics, said Minnesota's weakest banks appear to be growing weaker, while those in the middle may be stabilizing and the healthiest banks growing stronger. Anderson noted that the Tier 1 risk-based capital ratio, a key measure of bank health, was better than a year earlier at 58 percent of Minnesota's banks in the first quarter.

"Overall, the balance is positive," Anderson said. At the lower end of the curve, banks are continuing to drop, but the median or average has gone up, he said.

"I think you've got banks [in Minnesota] that are struggling and will continue to struggle in the near term, and if they can hang on long enough, then things will start to improve. But I think we'll continue to see banks that are continuing to fall by the wayside," he said.

The FDIC has a secret list of "problem banks." Though not all of them are expected to fail, the list increased in the first quarter to 775 banks from 702.

Foresight Analytics keeps its own watch list of troubled banks. Minnesota has 28 banks on it, up from 18 in the first quarter of 2009.

Anderson said a trend is emerging in which healthy banks and private equity concerns are taking over wounded banks that aren't quite failing and might be turned around.

"I think that there's a growing sense that overall we've hit bottom, and so there's some confidence that if you buy at today's prices ... the value isn't going to fall from here on in," Anderson said.

On the other hand, he said, mergers and acquisitions tend to be costly, a factor that favors larger banks. And if the economy goes into a double-dip recession, he said, the predicted number of bank failures will likely increase.