Industry conditions improving at slow pace

Conditions are improving slowing across the banking industry in the Upper Midwest, and it is likely to continue to improve at a slow pace through 2011, said Ron Feldman, senior vice president with the Federal Reserve Bank of Minneapolis. He briefed reporters on Feb. 24, a day after the FDIC released earnings information for 2010. (See page 12.).. Although banking conditions remain historically weak, Feldman said conditions are no longer getting worse and that there are signs of improvement. Conditions in 2011 are expected to improve, although he said "the pace of recovery could be quite slow.". Feldman said asset quality at banks is improving as bankers work through their portfolios of real estate loans. Given weaknesses in the real estate market, he said banks will have to find other areas of lending opportunity. Banks, he said, will need to resist the temptation to lower loan rates too far as they compete for borrowers with good credit histories.. Feldman said "this is a story about real estate," noting that banks that got in trouble concentrated their lending too much in commercial real estate and real estate development deals. Some banks complicated their problems by funding those deals with brokered funds rather than core deposits. Some banks have been able to work their way out of trouble by attracting new capital; he said closely-held and family banks had more success obtaining fresh capital than widely-held banks.. Feldman reported that 33 percent of the banks in the Ninth District have a CAMELS rating of three, four or five (Minnesota 36 percent; North Dakota 18 percent, South Dakota 24 percent and Montana 46 percent).. Across the region, lending has tightened. During 2010, the median bank in Minnesota saw net loan volume decline 2.9 percent; in Montana it declined 3.98 percent; in the Ninth Fed portions of Wisconsin and Michigan it declined 1.47 percent and 0.82 percent, respectively. At the median bank in North Dakota loans grew 1.78 percent and in South Dakota they grew 0.94 percent.. Median annual loan growth, which was at 9 percent in 2001, declined to negative figures in late 2010. Feldman said there are many reasons for a decline in lending in some states; examiners with the Federal Reserve, however, are not clamping down on lending standards, he said.. While averages show a 3.8 percent ratio of noncurrent construction and development loans and delinquencies as a percent of capital and allowances, Feldman said median data show that many banks simply do not lend in this area. Similarly, while averages show brokered deposits make up 3 percent of total liabilities, the median is zero, indicating many banks do not use brokered deposits at all.. Feldman said liquidity is generally strong, as are capital levels. Conditions in the agricultural economy are strong, Feldman said, although Fed examiners are watching for growing loan portfolio concentrations in ag real estate.. In the coming year, Feldman said industry observers should watch for improving industry performance ratios before they can expect CAMELS ratings to improve.