The Minneapolis Fed expects the state's community banks to keep improving slowly this year, but not back to precrisis levels.
The Minneapolis Fed is predicting middling improvement for Minnesota banks in 2012 as they continue struggling to increase their loan base in a lumbering economy.
Banks are paring their load of troubled commercial real estate loans -- a primary culprit in the recent bank crisis -- by charging them off, restructuring them, bringing in new capital and getting customers to pay them. But while asset quality may start to approach precrisis levels by the end of the year, loan growth probably won't and neither will profitability, the Fed said Wednesday in its first local bank forecast.
"It's still not back to normal," said Ron Feldman, a senior vice president at the Federal Reserve Bank of Minneapolis.
The Fed's forecast covered the mostly small 367 community banks chartered in Minnesota, a count that excludes major lenders chartered elsewhere including Wells Fargo, U.S. Bank, TCF Financial and BMO Harris. Twin Cities banks continue to do worse than the state as a whole.
There are glimmers of improvement on the loan front, which experts watch closely since loans are the main way community banks earn money. Loan levels have been shrinking, but the shrinkage at the median Minnesota bank lessened in the second half of the year, a positive trend.
Still, the total outstanding loan level at Minnesota-chartered banks at year end was still 2.5 percent lower than it was in 2010. In other words, the outstanding portfolio of loans still shrank, which Feldman said he suspects is mostly about weak demand for loans as opposed to stingy bankers.
Only about one-third of Minnesota's banks showed positive loan growth for the year -- up from 2010 but still far off precrisis levels, the Fed said.
Feldman attributed most of the improvement in loan levels to banks grabbing market share, as opposed to seeing existing customers borrow more. "It's stronger banks taking it from weaker banks," Feldman said.
For 2012, the Fed expects the median year-over-year loan growth for Minnesota banks to be between minus 2 percent and positive 2 percent. In the past decade, the median loan growth has been between 2 and 7 percent.
The Fed expects median profitability, as measured by return on average assets, at the end of 2012 to be between 0.8 percent and 1.1 percent. The median for the past decade has been about 1.2 percent.
The Fed's gloomier forecast for the 100 banks in the Twin Cities shows overall loan levels continuing to shrink or, at best, staying about flat. Profitability will range from 0.6 percent to 0.85 percent. The median for Twin Cities banks over the last decade was about 1.2 percent.
Rob Viering, a bank consultant in Monticello, said Feldman's "middling" outlook generally jibes with what he's seeing, except for his predictions on loan growth, which Viering called "a little optimistic."
Loan growth at community banks has been "pretty stagnant," Viering said, and he expects any real pickup to come in the last half of the year.
"We're seeing some turnaround in the economy, but business borrowing tends to lag," Viering said. "Not a lot of people want to go out on a limb borrowing more money until they're sure things have turned around.
"I think banks are going to be looking very hard at their expenses."
Jennifer Bjorhus • 612-673-4683