MN Banks Earned More in Q1; Can the Growth Last?

The state's banks saw a significant jump in aggregate earnings during the first three months of the year, but much of the growth can be attributed to a drop in provisions for loan losses.

Minnesota's banks earned more on average during the first quarter of 2011 than during the same period last year, according to recently released data from the Federal Deposit Insurance Corporation (FDIC). But it's yet to be seen if the growth can be sustained.

The 402 FDIC-insured institutions in the state together reported net income of $106 million for the first three months of the year. That's a significant improvement over the same period last year, when 410 insured institutions reported earnings of $65 million.

Total assets for Minnesota's banks grew to $64.9 billion from $61.2 billion last year. Deposits, meanwhile, jumped about 8 percent to $54.9 billion.

Banks also experienced an uptick in return on assets (ROA)-which the FDIC describes as a “basic yardstick of profitability.” The state's banks reported an average ROA of 0.65 percent, up from 0.42 percent during last year's first quarter.

Despite a significant jump in profits, earnings remain well below historic levels. For example, in the first quarter of 2007, the state had 448 FDIC-insured institutions that together earned $315 million. Banks during that period reported an average ROA of about 1.6 percent.

A quarterly report released earlier this week by the Federal Reserve Bank of Minneapolis described the Midwest's banking recovery as “weak.” Ron Feldman, senior vice president for the Minneapolis Fed, said that asset quality has “flattened out, basically at the bottom” for the region's banks.

Profits were driven by a decrease in provisions set aside for bad loans, rather than by core earnings, he said.

The new FDIC data shows that Minnesota banks set aside a total of $81.4 million in loan loss provisions-compared to $133.2 million last year. Feldman said that the earnings increase “is not likely to be sustained.”

In that regard, Minnesota seems to fall in line with national trends. The 7,574 FDIC-insured institutions throughout the country reported combined profits of $29 billion during the first quarter-up 66.5 percent from $17.4 billion during the first quarter of 2010.

More than half-56 percent-had higher quarterly net income compared to the first quarter of 2010, and only 15 percent reported a net loss for the quarter.

But the FDIC echoed Feldman's concerns that increased earnings may be driven by a decrease in funds set aside for bad loans, and that growth may not be sustainable. The nation's financial institutions together reported loss provisions of $20.7 billion-less than half of what was set aside during the same period last year.

“The industry shows continuing signs of improvement,” FDIC Chairman Sheila Bair said in a statement. “Though there is a limit to how far reductions in loan-loss provisions can boost industry earnings.”

To view first-quarter banking data and to navigate the FDIC's database of individual financial institutions, click here.