The financial condition of Minnesota banks is no longer deteriorating but is still at historically weak levels, and lending continues to fall. Those findings are part of a relatively grim assessment by the Federal Reserve Bank of Minneapolis.
The report assessed the quality of banks in the Federal Reserve's 9th district, which includes Minnesota, Montana, North and South Dakota, and parts of Wisconsin and Michigan.
The Minneapolis Fed found that banking conditions in the district are picking up, but very slowly. The quality of bank assets is showing mild improvements, the average profitability of banks is improving, and their cash position is stronger.
The FDIC reported Wednesday that Minnesota banks saw profits nearly triple to more than $200 million.
Still, the Minneapolis Fed report found plenty of continued weakness in the banking sector.
"Loans are shrinking, and banks are taking basically the funding that they have and moving it into safer assets," said Roger Feldman, senior vice president at the Minneapolis Fed.
Feldman said that for banks chartered in Minnesota, loan growth dropped by a median 3 percent in 2010 -- the biggest drop seen in at least a decade.
That's a problem for two reasons. For starters, a decline in loans is bad for banks.
"In Minnesota, banks make most of their money by returns they get on loans, and to the degree to which they don't have new loans to replace their existing loans, they're going to make less money," said Feldman, "because their alternative investments are things like securities, and securities aren't paying very much."
The drop in loans has repercussions in the greater economy, Feldman added. Lack of access to credit can keep small businesses from expanding -- and hiring.
"Banks are an incredibly important source of credit, particularly to small firms, and particularly small banks to small firms, and to the degree to which there are good projects that are otherwise not getting funded, we would expect the economy to grow less than it would otherwise," said Feldman.
But the perspective on why loans are down varies a lot, depending on whether you talk to a banker or a business owner.
THE BANKER'S PERSPECTIVE
Rick Beeson, president and CEO of Park Midway Bank in St. Paul, says the drop in new loans at his bank is on par with the Minneapolis Fed's report -- so, about 3 percent. Beeson attributes that to lack of demand, not a lack of willingness to lend on his part.
"Lending has been down. That reflects the cautiousness among small businesses to borrow money and make investments," said Beeson.
Despite the drop in new loans, Beeson says Park Midway Bank, which has $275 million in assets, made a bigger profit last year than the year before. Beeson says that was possible by retrenching -- not filling job vacancies, cutting bonuses, and backing off investments in technology.
"Going forward, the challenge will be booking new loans," said Beeson. "Demand is still slow but we do see an increase across the board, and we'll be out aggressively calling on prospects."
THE VIEW FROM THE OTHER SIDE
"Banks say they have money but there isn't that much available," said Bob Kill, president of the non-profit Enterprise Minnesota.
Kill says his organization's recent survey of manufacturers showed that credit remains tight. Thirty-six percent of executives responding to the survey cited some constriction of credit -- about the same percentage as last year. The poll has a margin of error of plus or minus 4.9 percentage points.
Kill says manufacturers are dealing with those tighter credit conditions by trying to run tighter ships.
"One thing manufacturers have done is decide that process improvement can help manage and make them more efficient," said Kill. "Just like you're hearing in consumer credit that they're trying to be a little more conservative, manufacturers are."
The Minneapolis Fed says poorly performing commercial real estate loans are the major reason for the drag on lending. If those bad loans end up in the banks' hands, that limits their ability to lend. About one-third of Minnesota chartered banks have heavy exposure to commercial real estate.
Looking ahead, experts at the Minneapolis Fed are worried that loans tied to agricultural real estate could be the next source of losses. Those loans are performing well for now. But as the recession made clear, having too much exposure to a sector that appears to be booming can have devastating consequences down the road.