Getting profits back to normal has been a challenge for Minnesota’s community banks, but particularly for those in the Twin Cities.
That’s the upshot of the Minneapolis Fed’s latest report on community banks in Minnesota. Released Monday, it showed that third-quarter loan volumes at Twin Cities banks fell about one-tenth of a percent from a year ago after four straight quarters of improvement. Profitability, too, slowed from the previous quarter.
“I don’t think there’s any other way to characterize it except weak,” said Ron Feldman, executive vice president of the Federal Reserve Bank of Minneapolis.
Feldman told reporters he wasn’t sure yet if the quarter was a blip or if it signals a trend.
The slip is a change from what’s otherwise been a general story of continued incremental improvements for the state’s banks, which have been struggling to grow profits in the face of ultralow interest rates and sluggish demand for loans. Community banks are even more reliant on interest income from loans than giant banks, with about 90 percent of community banks’ revenue coming from interest paid on loans they make.
Plus, the state’s small banks have exhausted their ability to goose profits through setting aside less to cover sour loans.
Profits statewide are still off the 20-year historic norm. Until interest rates rise, the state’s small banks will have to trim expenses and grow noninterest income from various fees for things such as investment services to generate more income. The Fed has been advising community banks not to take on too much risk in their reach for yield, he said.
Profitability is the story, Feldman said: “I think that’s where there’s been challenges for banks.”
Doug Hile, president and CEO of Chaska-based KleinBank, said he felt a precipitous slowdown in the third quarter but couldn’t point to any single factor as the cause. The uncertainties before the government shutdown in October and over the new health insurance market, plus a drop-off in mortgage refinancings, probably all played a role.
Deposits still are flowing into his bank, Hile said, but the level of uncertainty in the business community remains a hurdle.
“What I’m hearing from business owners right now is: ‘I’m just not sure,’ ” Hile said. “That ‘I don’t know’ is kind of wearing everybody out.”