Southwestern Minnesota might not be an obvious place to look for evidence of problems in the banking sector, an important employer in the state. The farm sector has been turning healthy profits lately, and that means bank loans to agricultural producers are performing well.
But the area's verdant farm fields are only a partial buffer against the headwinds facing most lenders.
"Profitability in the banking sector is going to be a challenge," said Greg Raymo, president of First State Bank Southwest in Worthington.
Although profits at Raymo's bank are up 6 percent over last year, due in part to the strong agricultural economy, he said it will be lucky to maintain that growth in the coming year.
The banking sector worldwide is being buffeted by a number of concerns including the European debt crisis, problem mortgages, and the slowing economy. Last week, the Wall Street Journal reported that Bank of America, the nation's largest bank, could slash as many as 40,000 jobs. While banking experts say Bank of America is especially troubled, the industry's profits are under pressure, and more layoffs might ensue.
Minnesota's banks are not immune to the bank industry's troubles, among them low interest rates. In part, the historically low rates are good for banks because they allow them to cheaply obtain money from customers. Banks do not have to pay a lot of interest on money held in CD's, or checking and savings accounts.
But low rates also limit the amount lenders can charge borrowers for loans. That puts a squeeze on profit margins.
Federal Reserve Bank Chairman Ben Bernanke previously had said rates will stay low for a couple of years — and he didn't back away from that statement at an appearance in Minneapolis last week.
That squeeze on profits coincides with rising costs to comply with new banking regulations Congress enacted in the wake of the financial crisis, Raymo said.
"We're spending a tremendous amount of our dollars on new forms, new documents, all with proper disclosure forms," he said. "It is an expensive venture to be complying with everything. It certainly is cutting into our profits."
New rules are also crimping revenue banks make from fees, including those retailers have to pay for each swipe of a debit card. Banking experts say some big banks might be in a better position than smaller ones to recoup some of that revenue with new fees — on checking accounts, for example.
On the whole, experts say banks that struggle financially under the new requirements will likely respond by cutting costs.
That typically means layoffs, said Jon Arfstrom, a regional bank analyst with RBC Capital Markets in Minneapolis.
"One of the biggest expenses for a company is headcount," he said. "And I fully expect banks to look internally and look for more ways to become more efficient, and unfortunately that means loss of jobs," he said.
But Arfstrom does not expect deep cuts. Like other experts, he thinks Minnesota's banking sector is somewhat protected. He notes that the big banks in Minnesota already are pretty lean, and the state's banking sector has weathered the bad economy better than lenders in other parts of the country.
Steve Hine, the state's chief labor market analyst notes that employment trends for the finance and insurance sector, which includes banking, held up better than other industries during the recession.
What's more, finance and insurance firms lately have added jobs. As of July, the industry has added about 1,900 jobs over the year.
"Just recently we've seen a pretty dramatic uptick in the number of jobs there," Hine said. "And commercial banking and insurance have led that sector out of the slump."
Even if the sector's employment and profitability have held up, the future may be challenging. Investors are clearly worried. Bank shares have been particularly hard hit since the stock market plunge that started in late July.
A recent study of banking conditions by the Federal Reserve Bank of Minneapolis showed that the typical Minnesota bank has experienced a greater drop in loan growth over the past year than the median drop for U.S. banks. There are still 108 banks on the Minnesota Department of Commerce's "watch list."
In part, weak loan growth results from companies' reluctance to borrow in the dicey economy. It's also a result of banks' tighter credit policies, which slow economic growth.
"It could be one of the contributing factors for why the recovery has been so slow," said Ron Feldman, a senior vice president for the Federal Reserve Bank in Minneapolis.
Weak lending and the slow recovery are so linked, Feldman said, that any boost in lending at Minnesota banks would be evidence of a stronger recovery.