Maximum Capacity

Competitive Factors

No one wants to lend money to troubled businesses, but Minnesota bankers don’t generally have that problem. The state has a good balance of large and small businesses, as well as a balance across the manufacturing, service, technology, and medical sectors, notes John Falb, Minneapolis-based senior vice president and division head at Chicago-based LaSalle Bank. Many Minnesota firms enjoy good financial health, having weathered the most recent recession. “I think that, across the Midwest, the economy has been very solid since the early part of 2003,” Falb says.

Many businesses put off making expensive changes during that recession and are now confident enough to seek loans for previously postponed projects. “We’ve seen a lot of increase in commercial development,” says Brad Bakken, president and CEO of Citizens Independent Bank, based in St. Louis Park. “A lot of things were delayed.” Banks want to back loans for the projects that healthy companies have begun to pursue again.

Banks themselves are also feeling prosperous, which allows them to devote time to expanding. “When a bank has loan problems, they spend a lot of time trying to fix them,” says Rick Wall, CEO of Highland Bank. “There haven’t been a lot of problems industry wide in the past 10 years, and so bankers have had time to grow their businesses.”

With banks are doing well, it’s not surprising that a number of new ones have launched in Minnesota. Though the industry has also had its share of mergers, the new banks have served to increase the total amount of money available for loans. “When banks merge, their loan capacity generally increases or stays the same,” notes Scott Hutton, president of Drake Bank in St. Paul. “When new banks get started, it gives the consumer new opportunities for credit.”

New or established, banks are aggressively pursuing both traditional and more novel capital sources. Deposits are a traditional liquidity source for which banks avidly compete. Bankers are particularly interested in commercial customers, Flesvig says, because companies tend to put their deposits at the same bank they go to for business loans. “Commercial loans allow us to develop a full relationship with a business and its principals,” Flesvig says. “For the most part, the place where a business has its commercial lending activity is the place where it generally keeps its deposits. The more commercial lending you can do, the more commercial deposits you can gather.”

Also, the market has expanded for trust-preferred products, a banking industry version of collateralized debt obligations, or bonds, which banks can use to increase their tier-one capital. More tier-one capital—a bank’s main operating capital—can help a bank increase loans. Trust-preferred instruments were once issued mainly by large banks, in deals that were big enough to be cost effective. Smaller, community banks got in on this method of increasing capital in 2000, when investment banks began to pool trust-preferred offerings from many small banks.