Bank asset quality: Weak, but improving

  • Article by: JENNIFER BJORHUS , Star Tribune
  • Updated: December 22, 2011 - 4:13 PM

The local Fed says a third of Minnesota's 372 banks are still in "less-than-satisfactory condition."

Minnesota banks showed "sluggish improvement" in the third quarter, the Federal Reserve Bank of Minneapolis said Monday. But they haven't regained their pre-financial crisis shape.

In its quarterly good news/bad news summary of banking conditions, the local Fed concluded that the high number of problem banks in the state is a "headwind against the economy growing."

Altogether, 124 banks, or one-third of Minnesota's 372 banks, are still considered to be in "less-than-satisfactory condition" and subject to heightened scrutiny from regulators, according to the Minneapolis Fed. That's down slightly from about 36 percent of Minnesota banks last year and shows the journey toward recovery is far from over. The Fed's quarterly review doesn't include Wells Fargo or U.S. Bank, which aren't chartered in Minnesota.

The good news: The load of soured loans, primarily bad commercial real estate deals that were the crux of the community banking crisis in Minnesota, continues to shrink. The median ratio of loans that are late or not paying, to bank capital and reserves was 15.2 percent, down considerably from 19.5 percent a year ago although still above pre-crisis levels of around 11 percent. At the height of the banking turmoil in 2009, the ratio hit 24 percent.

For banks in the Twin Cities, the ratio dropped to 22.4 percent, down from 31.4 percent a year ago.

In short, asset quality is weak but improving.

That's call for optimism, said former banker Jeff Judy, a bank consultant in Bloomington who reviewed the summary: "This is an indicator of better times on the horizon."

Having fewer failed loans means banks don't have to set aside as much in provisions to deal with them, giving profits a lift -- but not much at the moment because banks are lending less, meaning they collect less interest income. The median return on average assets for Minnesota banks was 0.79 percent, up from 0.67 percent a year ago. The pre-crisis norm was about 1.3 percent. The median net interest margin, a key measure of profitability, was a decent 4.13 percent, largely flat from 4.15 a year ago.

Given the depth of the recession and financial crisis, today's middling situation is about what one would expect on the road to recovery, said Ron Feldman, senior vice president at the local Fed. Feldman, who gave the overview, said he predicts more banks to fail "but we're not going to see a big uptick."

What seems unusual for this stage in the recovery is the persistent declines in loan growth, a subject the regulator is looking into, Feldman said,

The median loan level in the state has dropped, year-over-year, every quarter for the last two years and the declines have accelerated, according to the Fed's summary. In the third quarter it sank nearly 4.2 percent from a year earlier, when it dropped about 2.1 percent. That's troubling because less lending means less money available to local communities and businesses to goose the economy.

"I'm surprised loan growth has remained so stubbornly negative," Feldman said.

At a glance, the falling loan levels appear to be a combination of the lack of demand in a slow economy, tighter lending guidelines and banks that are too weak to boost lending, Feldman said. Expect continued lethargy, he said, adding that he was stopping short of using the word zombies.

Banks are sitting on big inventories of repossessed homes, commercial buildings and land. But it appears the accumulation of those holdings may have crested and may finally be turning down. The median of repossessed properties as a percent of bank capital and reserves was 6.4 percent in the third quarter, down from 6.8 percent a year ago. It's not clear if banks are starting to liquidate more inventory at a faster pace, or if there are just fewer properties coming in.

Judy said he thinks the standoff between banks and real estate investors lobbing low-ball offers is finally easing.

"I think we're finally hitting that equilibrium point," Judy said. "The offers come in are probably more reasonable or realistic."

Minnesota is known for a large population of banks. But hard times continue to whittle away at the lineup. At 372 banks, the state has about nine fewer banks than it did a year ago and is losing about two to four banks a quarter lately.

The recent vanishing act isn't about bank failures, Feldman said. Only two banks have failed this year in Minnesota: RiverBank in Wyoming, Minn., and Rosemount National Bank. Banks are simply disappearing in quiet mergers, Feldman said, and most of the buyers are neighboring banks. More banks will look to sell, he said, if profits don't pick up.

Jennifer Bjorhus • 612-673-4683

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