Minnesota's small banks thrive amid a big surge in loan demand.

Something enviable is happening at Minnesota banks -- a healthy surge in loan demand.

It's the first big jump in more than three years, and it's boosting profitability at the state's 584 small commercial banks.

Commercial and industrial loans by all Minnesota banks rose $200 million in the first quarter, according to the Federal Deposit Insurance Corp.

The gains have increased the group's average return on assets from 1.12% at yearend 1992 to 1.21 at the end of the first quarter, according to data supplied by Ferguson & Co. and compiled by the American Banker.

Average return on equity for the group -- 13.04% at yearend 1992 -- also was up, to 14.34% at the end of the first quarter.

|A Pretty Good Year'

"So far, it's been a pretty good year," said Michael LaFrance, vice president at Elysian State Bank, which earned an enviable 3.16% return on average assets in the first quarter.

"Minnesota banks are making one heck of an effort to lend locally," said Tom Bengtson, publisher of the Northwestern Financial Review, a regional magazine based in Minneapolis.

Indeed, even the Twin City powerhouse First Bank System has been actively courting small and middle-market businesses throughout the state.

First Bank has unveiled a program aimed at attracting small and midsize businesses, in addition to its corporate lending unit.

"The middle market is what is really growing," said William F. Farley, vice chairman of the $25 billion-asset company.

First Bank has made a hefty $70 million in new commercial and industrial loans this year alone.

"Loan demand has picked up," said Everett E. Kelly, chief executive of Minnwest Bank Dawson.

Conditions have turned around so much in Mr. Kelly's central Minnesota community that he was able to plow about $450,000 from his bank's $1 million loan-loss provision into the income stream.

Tops Availability Study

Strong demand for loans propelled Minnesota to the top slot in a survey of credit availability in nine states.

The study, Project 21, was conducted by the Greater Des Moines Chamber of Commerce. It found the ratio of loans to deposits at all of Minnesota's banks higher than those in six other midwestern states, Texas, and Tennessee.

The Minnesota economy consistently performs "above average," said University of Minnesota economist Tom Stinson.

"The last recession didn't ever really hit Minnesota," he said, adding that the state picked up 93,000 jobs from December 1989 to December 1992.

What's more, the state's relatively low reliance on defense spending positions it for further growth as military cuts increase.

To be sure, not all of the state's bankers are celebrating. Severe rains have delayed crops in southwestern Minnesota, dampening potential returns for many bankers with large agricultural-loan portfolios.

|Some Agricultural Losses'

"Clearly there will be some agricultural losses this year," said Mr. Stinson, who also functions as the state's economist.

Minnesota may see a drop of close to 1% in net personal income this year just as a result of the flooding, according to Sung Won Sohn, chief economist at Norwest Corp. in Minneapolis.

In some areas, losses from drowned crops and flooded rivers are likely to be higher.

Still, Mr. Sohn added, the higher prices for commodities such as corn and soybeans may prove a windfall for farmers -- and their bankers -- in areas not afflicted by the flooding.Profit LeadersMinnesota's 10 most profitablecommunity banks* Return Assets on assets (millions)Minnwesst Bank Dawson 5.16% $30State Bank of Aurora 3.69 18Green Lake State Bank, 3.52 26SpicerBank of Elbow Lake 3.32 13Elysian State Bank 3.16 18Nicollet State Bank 3.13 23American National Bank, 2.82 20NashwaukGranger State Bank 2.69 4First State Bank, Bigfork 2.58 14Farmers and Merchants 2.58 53State Bank, Pierz*Banks that have assets of less than $1 billionand that are not owned by holding companies withmore than $1 billion of assets. First-quarter '93 dataMinnesota's 584 Small BanksTotal assets: $30 billion (2.38%)Average ROA: 1.21%Avg. loan/deposit: 63.46%Total net income : $95.6 millionAverage ROE: 14.34%

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