Minneapolis Fed: Headwinds impeding loan growth for community banks

Minnesota's community banks may be nearing a new normal in which they won't be as profitable as they have been in the past, a top local Fed official said Tuesday.

But local Fed Executive Vice President Ron Feldman said he still needs another year or so of results to know for sure.

Talking to reporters at the Federal Reserve Bank of Minneapolis, Feldman said that the main thing driving bank profits isn't new loan growth but dipping into their reserves for future loans, or simply setting aside less for them.

Given the extremely low level of such reserves now, that option is running out. He delivered a subdued outlook for the state's community banks.

"For 2014, I'm expecting a better year but not a great year," Feldman said.

Profitability, or return on average assets, appears to have stalled around 0.95 percent, below the 20-year norm of 1.2 percent.

Community banks continue to struggle with subpar loan growth, despite a strengthening economy. As a whole, they increased loans by a median 3.09 percent over 2013. That's the best showing in several years but well off the 20-year norm of nearly 6 percent.

Feldman said that the rate of loan growth is out of sync with the country's economic health and that he is searching for explanations.

Banks may have tightened loan requirements slightly but not enough to substantially slow growth, he said.

He's looking for hidden head winds, and speculated that business clients are still unwilling to take the leap and make investments, and that competitive alternative non-bank lenders are poaching customers.

"There's something going on that's impeding loan growth," Feldman said.

One area that hasn't been impeded is construction and land development loans, the source of so many nightmares when real estate prices collapsed during the bust.