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Minnesota banking conditions improved in 2012

The Federal Reserve Bank of Minneapolis projects continued steady improvement for Minnesota banks across key measures of earnings, growth and asset quality.

“Banks in Minnesota have registered gains in emerging from crisis conditions over the past several years,” said Ron Feldman, senior vice president of supervision, regulation and credit at the Federal Reserve Bank of Minneapolis. “I expect 2013 to see continued improvement in loan growth and profits, although at a slower pace than last year. Both measures will likely remain off long-run medians. Problem loans should also decline, but given their already low levels, this decline will be measured.”

The Federal Reserve Bank of Minneapolis released a report on banking conditions this week.

The key measures of banking conditions reported at year-end 2012 all fell within the range of projections offered by the Federal Reserve Bank of Minneapolis a year ago.

“The pace of loan growth was at the high end of expectations, while profitability and loan performance ratios landed right in the center of the forecast range,” the bank reported.

2012 Performance

According to data collected at year-end 2012, Minnesota banking conditions had middling to strong improvement for the year. The median level of problem assets (as a percent of the resources banks must have to cover potential losses on loans) fell to 11.63 percent at year-end, improving considerably from the 13.22 percent rate of a year ago.

The current ratio compares favorably to the long-run median. Profitability as measured by the median return on average assets improved to 0.92 percent at year-end, up 15 basis points from the previous year.

Minnesota banks saw negative loan growth throughout 2009, 2010 and 2011, but the annual rate for 2012 reached 1.7 percent. Banks in the state continued to maintain record high levels of capital and liquidity in 2012.

Total risk-based capital declined by about half of a percentage point from a year ago to 15.34 percent, while Minnesota banks have steadily reduced reliance on “noncore” funds for more than three years, the bank reported.

2013 Forecast

The 2013 forecast projects the level of problem assets to remain steady or improve. Currently at 11.63 percent, the ratio of noncurrent and delinquent loans to capital and allowance is expected to end 2013 between 8.5 percent and 12 percent. The return on average assets (a key measure of profitability) should continue to climb in 2013 to somewhere between 0.95 percent and 1.10 percent. That range for profitability stands below the long-run median. Loan growth is projected to rebound to a range of 3 percent to 7 percent, the upper end of which is closer to historical norms.

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