No loans, weak earnings still dog Twin Cities banks | Finance ...

Ron Feldman

Customers remain reluctant to borrow

Performance by Minnesota and Twin Cities banks continued to improve in the third quarter but only slightly, according to a quarterly survey by the Federal Reserve Bank of Minneapolis.

And the symptoms of that slow, meager economic recovery is taking a toll on banks, according to the Ron Feldman, a senior vice president at the Minneapolis Fed and author of the report.

The worst news in Feldman?s report was a continuing decline in lending in the Twin Cities. More than half of local banks have shown year-over-year declines in loans in each quarter dating back to early 2009, according to the report.

?Bankers will say that?s their biggest concern,? Feldman said. Loans provide banks with their highest profit margins, even when loan prices drop as they have in this competitive banking environment.

Although profitability crept a little higher in the quarter, the increase came from a reduction in failing loans ? which enabled banks to move some of their loss reserves to the bottom line ? not from gains in banks? core source of earnings.

?If this situation is going to last another six to nine months, we?ll say it?s a deviation from historical norms but not a big deal,? Feldman said. ?If this lasts three, four, five more years, then we?re looking at the lost decade, a long period of no growth.?

St. Paul-based Anchor Bank was one bank that managed to increase its lending during the quarter, but those gains came from taking customers away from other banks, said Anchor CEO Jeff Hawkins. ?That can?t go on forever,? he said.

Hawkins said he doesn?t see signs that his commercial or real estate customers will increase borrowing soon. ?They?re still building up their cash and they?re deleveraging (reducing their debt). Customers? utilization of their lines of credit is at historic lows. They?re waiting to see real increases in sales before they move, and they aren?t seeing that yet,? Hawkins said.

The reduction in problem loans has been under way for over two years, and banks have been cleaning up their balance sheets by charging off failed loans or by restructuring the loans so that the borrower can afford the new loan. In either case, the banks are able to reduce their amount of loss reserves ? provisions, in banking parlance ? and moving them to the bottom line.

A local exception to that loan quality improvement was in the commercial real estate and construction and development portfolios at some banks. Although Minnesota and Twin Cities banks continued to improve overall in those sectors, Feldman said ?outlier? banks continued to be weighed down by problem loans.

The portion of delinquent CRE loans at the median Twin Cities bank was approaching the region?s historical norm, which is near zero in the third quarter. But banks above the median ranged much higher in their failed loans, Feldman said. The Twin Cities bank that ranked at the 75th percentile had over 15 percent of its CRE loans failing.

Another reason that Twin Cities bank earnings aren?t climbing is the high number of foreclosed properties that they?re keeping on their books.

The Fed measured the percentage of foreclosed properties ? other real estate owned or OREO ? and found the median for Minnesota banks at 5 percent.

But Twin Cities banks above the median in OREO again ranged much higher; the bank at the 75th percentile was over 30 percent.

?That?s a really big deal to banks, because it?s costly to hold them ? to pay insurance, to maintain them, to try to market them,? Feldman said.

TC banks: still far to go

Failing loans at Twin Cities banks are still far above historic norms; profits are well below norms

TC median bank Q3 /?TC 75^th?percentile / 20-year median

Problem loans, total:?16.5%?/?25.5%?/?11.2%

Problem loans, CRE:?7.1% / 14.69% / 1.85%

Profit (return on assets): 0.68% / 1.18% / 1.12%

Source: Federal Reserve Bank of Minneapolis

This entry was posted on Tuesday, November 20th, 2012 at 5:46 pm and is filed under Finance & Banking. You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.

Source: http://finance-commerce.com/2012/11/no-loans-weak-earnings-still-dog-twin-cities-banks/

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