Fed sees fierce competition among banks

Minnesota's community bankers are reporting "exceptionally fierce" competition for commercial loans, according to the local branch of the Federal Reserve.

That's good news for qualified borrowers, who may be finding greater room to negotiate more favorable loan covenants. But for bankers, it's playing into Minnesota's weakened community bank performance in the first quarter, according to the local Fed's quarterly summary of banking conditions, out Thursday.

Profits, as measured by return on average assets, were flat from a year ago and from the previous quarter, with the median at 0.92 percent. That's below the historic norm which is around 1.2 percent.

Loan growth, meanwhile, slowed to less than 1 percent in the first quarter, up from a slight negative a year ago but down from growth of 1.7 percent in the previous quarter.

Ron Feldman, senior vice president at the Federal Reserve Bank of Minneapolis, told reporters that while he had forecast slower growth this year, the creeping pace of the first quarter was "actually worse than I expected."

The story for banks has moved well away from the crisis that engulfed them a few years ago, to one of a struggle to grow profits.

The median net interest margin for Minnesota's community banks — which measures the difference between what banks earn on assets such as loans and what they pay out in interest — posted one of the largest quarter-to-quarter drops in 20 years, he said. It now stands at 3.8 percent, well below the norm of about 4.9 percent.

Banks have been goosing earnings by setting aside less money to cover loans that may go bad in the future. That's legitimate, but it's not sustainable, Feldman said.

The Fed's summary covers more than 350 community banks chartered in Minnesota. It doesn't include Wells Fargo Bank, U.S. Bank, TCF Bank or BMO Harris Bank, which are chartered elsewhere.