Recession hangover lingers for Minnesota's smaller banks

  • Article by: JENNIFER BJORHUS , Star Tribune
  • Updated: August 23, 2012 - 9:44 PM

Despite some gains, Fed report says, state's community banks still are seeing few new loans.

The road to recovery for Minnesota's community banks has been long and slow.

The current recovery is taking longer than recovery from the bank bust of the 1980s and early '90s, the Minneapolis Fed said Thursday. That's partly because bank profits took a bigger dive during the Great Recession, particularly in the Twin Cities, but also because the current economic recovery is stuck in slow gear.

The Fed compared the two most recent banking recoveries in its second-quarter report on banking conditions in Minnesota. The report showed what the Fed called some "strong" improvements in bank balance sheets. Banks continue working off their stash of repossessed real estate.

The level of problem loans as a percentage of resources dropped to a pre-crisis level of 12.7 percent, and is just a bit above the 20-year median. Asset quality at Twin Cities banks continues improving but still hasn't returned to normal.

Second-quarter profits, measured by the return on average assets, showed a small improvement.

New loans, however, remain too scarce. That's a key concern, because community banks largely make money by making more loans, not by other activities such as investing in securities.

Loan activity is headed in the right direction but net loan growth remains negative.

The annual rate of loan growth was -0.4 percent for the median bank in the second quarter, up from -4.7 percent a year earlier and -1.3 percent in the first quarter. That's still low, but the trend is improving, said Ron Feldman, senior vice president at the Federal Reserve Bank of Minneapolis. Most of the improvement came from agricultural loans and residential real estate, likely mortgage refinancing. Now, nearly half of Minnesota banks are posting positive loan growth.

"The recovery is just starting for loan growth," Feldman told reporters.

Bankers tell him the real challenge is a lack of creditworthy borrowers, Feldman said.

The Fed's quarterly report covers more than 350 community banks in Minnesota but excludes major lenders chartered elsewhere, including Wells Fargo, U.S. Bank, TCF Financial and BMO Harris.

To see the report go to

Jennifer Bjorhus • 612-673-4683

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