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Midwest banks' recovery is 'weak'

  • Article by: NEAL ST. ANTHONY
  • Star Tribune
  • May 23, 2011 - 8:25 PM

A rebound for Twin Cities banks since 2010 remains hobbled by a sluggish commercial real estate market, according to the quarterly survey by the Federal Reserve Bank of Minneapolis. Moreover there was little to no loan growth in the first quarter of 2011 at banks across the Upper Midwest.

"In terms of banking conditions ... we are still in a weak recovery," said Ron Feldman, senior vice president of the Minneapolis Fed, which oversees banks in the Ninth Federal Reserve District extending from Upper Michigan and western Wisconsin to Minnesota, the Dakotas and Montana.

The value of underlying commercial real estate that secured hundreds of millions in outstanding credit was flat in the first quarter and non-current commercial real estate loans, in which borrowers were behind, averaged about 10 percent of bank capital, down from 14 percent in 2009.

Feldman said he was surprised that key indicators were flat in the first quarter. But he said he would not be concerned unless the trend continues.

The good news is that loan quality has stabilized and profitability has stopped falling.

The results of the quarterly Minneapolis Fed survey do not include U.S. Bank and Wells Fargo because they are chartered in states outside of the Ninth Federal Reserve District. However, Feldman said that because there are so many banks included in the study -- 694 -- the addition of the bigger banks would not substantially change the findings. Minnesota has about 400 of the district's 694 banks.

Indeed, U.S. Bank reported in April that first quarter profits were up 56 percent over the first three months of 2010, but most of that was attributed to the fact that it needed to reserve hundreds of millions of dollars less for non-paying loans than it did in the first quarter of 2010.

Feldman said declining provisions for likely loan losses rather than improved "core earnings" from interest income and fees is the major contributor to improved bank profitability. Feldman predicts that bank health will improve slowly in 2011 as the economy improves.

There is also belief among some bankers that 2011 will turn out well.

"We're seeing more loan demand than we were a year ago from good creditors," said CEO Tony Lemaire of St. Paul-based Western Bank, a big community bank that has been an above-average performer over the years. "There are signs of improvement. This will be a good year of modest loan growth and profit growth."

When will customers return?

Jennifer Thompson, a bank analyst at Portales Partners in New York City, said recently that the current lending malaise is consistent with past economic recoveries going back to the 1970s.

"Sooner or later, companies will have to borrow again," Thompson said.

However, many big companies are financing most of their growth from huge cash reserves they built as they cut spending and payrolls during the recession. And lenders have been slow to provide additional credit even to good small businesses because of more-conservative loan standards and tougher bank exams.

Minnesota banks in the first quarter, on average, had loaned an amount equivalent to about 63 percent of their deposits, compared with 71 percent at the peak of the economic expansion in 2006. Banks in South Dakota and North Dakota were loaned out at 58 percent and 56 percent, respectively.

As net loan growth declined by up to 5 percent across the states of the Ninth District over the last year, total assets have grown. That means that bankers have invested less in loans and more in lower-yielding U.S. government securities, which also has depressed interest income, usually the single largest source of bank revenues.

Tiny Rosemount National Bank is the only Minnesota depository that's been closed by federal regulators so far this year. Fewer than 100 of the district's 694 banks have received the two-lowest scores on a five-point scale for safety and soundness, according to federal regulators -- about the same as in 2009 and 2010.

About 35 banks have failed nationally this year and about 360 since 2008.

Neal St. Anthony • 612-673-7144

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