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Recession put banks at forefront, but despite tough times, local community banks are still faring well

WILLMAR -- When the Federal Deposit Insurance Corp. issued its first-quarter report last month on bank performance, some of the news was concerning.

The number of banks in distress is on the rise, and some analysts predict that a handful of community banks in Minnesota might fail by the end of 2009.

Despite tough times in the banking industry, however, the majority of the state's community banks -- including those in this region -- are faring relatively well.

"We've tightened our underwriting standards when it comes to loans. We look at our loan applications much closer," said Jeff Berghuis, president of Citizens State Bank of Clara City. But the bank is well capitalized and has even seen some loan growth, he said. That's echoed by Shane Deal, Willmar market president for North American State Bank.

"We have money to lend. Their money is very safe," he said.

The report, issued at the end of May, covers the financial performance of 429 FDIC-insured banks whose headquarters are in Minnesota. Overall, Minnesota banks have seen their profits fall to a collective $101.4 million for the first quarter of this year. The banks earned a profit of $292 million just one year earlier.

Loan losses have been highest in the Twin Cities and outer suburbs.

To be sure, the recession has had a local impact, said Greg Hilding, president of Bremer Bank in Willmar.

"By no means are we immune," he said. "There certainly is an effect on a number of sectors. When you're directly impacted by this downturn, it is very real."

The boom of earlier years and the subsequent meltdown have been muted, however, in west-central Minnesota. And virtually no local community banks engaged in risky subprime mortgages, the type of practice that undid many other banks when the real estate bubble burst.

"In general I don't think rural Minnesota experienced the level of appreciation in housing and commercial property that the metro area did," said Larry Knutson, president of Concorde Bank of Blomkest and Willmar. "We have definitely seen an adjustment but not as drastic as the Twin City area. I do think there is interest in purchasing property but I would say people are more cautious and really try to think things through."

Minnesota hasn't seen a bank failure since May 2008, Hilding said.

"Not that there couldn't be another bank failure or two, but Minnesota is not facing a meltdown in the banking business," he said. "I certainly believe there's a lot of strength in the community banking sector in Minnesota."

The local focus of community banks puts them in a prime position to know their customers and be able to evaluate risk, Deal said.

When he or his loan officers work with a commercial client, for instance, "we can walk by the business. We can drive by the farm," he said. "That speaks volumes to our risk profile. We understand the risk because we participate in our communities."

Because community banks are smaller and less complex, they also tend to be more transparent and more straightforward to regulate, he noted.

The region's community banks have been trying to respond to the public's unease about the health of the banking industry.

Berghuis said he hears comments on Main Street about the meltdown and bailout of the banking giants.

"It's caused a very bad taste in people's mouths. They're uncertain as to whether their money is safe," he said.

He sees education, especially of bank staff, as important in helping ensure consumers have accurate information.

"We're determined to do everything we can to help get our customers through this," he said.

Indeed, instead of downsizing, Citizens Bank has added a couple of employees to help steer the bank and its customers through the current economic crisis, he said.

"There is a lot of information available. People do need to be informed," Hilding said.

Worried consumers can talk directly with someone at their bank or obtain the bank's publicly reported financial statement, he said.

"By and large our customers have been very understanding and aware of the fact that what they're hearing is not necessarily applicable to what they're experiencing from their hometown bank," Hilding said. "We've certainly had questions and we've tried to ramp up communication."

One piece of reassuring news: Last fall the FDIC raised its insured limit to $250,000 per depositor, a move that broadens consumer protection if a bank were to fail. In May the FDIC also adopted a new system that places more of the fee burden on the largest financial institutions for replenishing the FDIC insurance fund.

Hilding thinks one of the results of the financial meltdown might be a return to the basic traditions of community banking.

"The credibility of traditional banking is coming back into focus," he said. "Relationship is a little more important to them. I think that's being reinforced."

Local bankers don't expect the economy to improve overnight. Banks might also face some measure of shake-up.

"We know there will be some regulatory changes," Knutson said. "We also expect that there will be some special concerns from regulators when they visit our banks. There are also some fundamental changes that our customers are dealing with. I think we are all in somewhat a state of transition as adjustments are made. No matter what business you are in, watching expenses has become paramount."

Anne Polta

Anne Polta covers health care, business/economic development and general assignment. Her HealthBeat blog can be found at Follow her on Twitter at @AnnePolta.

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