Despite closures, Minn. banks faring well during downturn

The assets of Prosperan Bank in Oakdale were taken over by North Dakota-based Alerus Financial late last week, but customers were able to do business as usual Monday.

Minnesota is home to about 420 banks and since the start of the credit crunch, seven have failed. That might not sound like very many, but before this latest batch of failures, the last state bank failure we had was in the year 2000, nearly 10 years ago.

Kevin Murphy, Minnesota's deputy commerce commissioner, said economic conditions have taken their toll on the state's banks. Many have suffered losses tied to commercial real estate and residential development loans.

Murphy said most of the state's banks are weathering those stresses and are actually in pretty good shape, but about 1 out of 5 banks and credit unions are on a "watch list," due to rising loan losses.

"The FDIC always said that bank failures through 2010 are going to be happening at a good clip."

"In the last quarterly update, we had around 71 banks on our watch list," Murphy said. "Most of those were so-called '3' rated banks, which is a less severe category. The rest were in the more severe '4' and '5' category."

Murphy said if a bank is on the watch list, that doesn't necessarily mean it will fail. Examiners may ask that bank to raise more capital for its reserves; that way it can cover loan losses. But Murphy said raising capital in the current economic environment can be tough to do.

Over at the Federal Deposit Insurance Corporation, the sense is the shutdowns will continue.

"The FDIC always said that bank failures through 2010 are going to be happening at a good clip," said FDIC spokesman Greg Hernandez.

Hernandez said despite the continued bank closings, the pace of failures is slackening. He stresses that no matter what happens to a bank, consumers should know their deposits are safe.

"The one thing we want to remind depositors is that if you're within the $250,000 insured limit, your money is safe, it's sound, no one has ever lost a penny of insured deposits, and no one ever will," Hernandez said.

When a bank fails, customers can often still go to the same physical structure as before for their banking, because another bank has taken over. Brad Ruiter of the Minnesota Bankers Association said that's how Prosperan's shutdown last week worked out.

"When we hear about banks closing, the term is correct because the name and charter of the bank has changed, but the actual building itself doesn't shutter or close, it reopens under a different name," Ruiter said.

Ruiter said despite the bad news about bank failures, he'd like to point out that many Minnesota banks are doing okay -- and increasing their lending. He said lending in the state has been up for the past six quarters. In the most recent quarter, it was up 2 percent over the year before.

"The fact that lending has gone up for six straight quarters, it hasn't even really dropped throughout the course of the recession is a little remarkable," he said.

Minnesota's unemployment rate has been ticking down, and Ruiter said that will likely help the state's banking industry all the more, since banking is tied directly to the fortunes of its customers. But Andrew Winton, a finance professor at the University of Minnesota, said continued weakness in the commercial real estate sector, for example, will likely continue to exert stress on lenders -- and lead to more losses.

Winton said that could bring about another major meltdown in the lending industry, but he doubts that will happen.

"But it seems much more likely that the banks are going to have this continued overhang of problems to work through, which slows down their recovery," he said.

And, Winton said, that in turn, will slow down the overall economic recovery of the country.

You can check out the health of your bank at the FDIC Web site.