Report: Minnesota banks gained, but 2012 not a banner year

Minnesota's community banks enjoyed some financial gains in 2012, according to a report from the Federal Reserve Bank of Minneapolis.

But it was not a banner year, according to Ron Feldman, senior vice president of supervision, regulation, and credit at the Minneapolis Fed.

"I don't think that people look at the amount of profits and say, 'Wow, this was an unprecedented year," he said. "It was better than normal but not a huge upside."

And Feldman expects 2013 won't outperform 2012.

"I'm expecting a year kind of like that but not as good," he said.

Profits and loan growth both rose at Minnesota's 360 community banks last year. However, both measures were lagging long-run trends and may not return to historic levels.

Feldman said banks turned profits last year largely by setting less money aside in reserves to cover potential loan losses or by pulling money out of reserves. Both actions, which Feldman noted were not improper, resulted in making banks look more profitable.

As fewer loans default and banks set less money aside for provisions, the manipulation of those funds will no longer boost profits, Feldman said.

"The provisions that really propelled people forward -- you can't keep doing that. It just runs out, just as a matter of arithmetic," Feldman said.

Loans are a more common source of profits for banks. And loan volumes did increase in 2012 in areas such as commercial and industrial lending, as well as residential mortgages. The median Minnesota bank enjoyed a loan growth rate of 2 percent in 2012.

But that's well below the 20-year trend of 6 percent a year.

Feldman said loan volumes may not return to long run trends anytime soon.

"Maybe there's more competition. Maybe firms don't borrow as much. Maybe firms are going to hold more cash and try to fund themselves with their own cash and therefore they would need to borrow less," the Fed official said.

Lower profits and loan volumes may be the "new normal" for banks.

Terri Barrett, a loan officer at Financial Security Bank in Kerkhoven, agreed with much of Feldman's assessment, particularly with respect to competition for borrowers.

"It has become increasingly difficult to draw in customers without being extremely competitive with rates and terms," she noted.

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