Community Banks in Nine Southern States Show Improving Performance; Oil and Gas Activity Drives Deposit Growth in Several States

DALLAS — Housing and commercial real estate show increased activity and improving values, as the oil and gas industry drives growth in several sectors of the nine-state southern district, officials from the Office of the Comptroller of the Currency (OCC) said today.

“The financial condition of community financial institutions continues to improve and most of the metrics we track of key financial areas are positive for the institutions we supervise,” said Gil Barker, the OCC’s Southern District Deputy Comptroller. “Most banks with asset quality issues are having success reducing problem assets which has resulted in a significant decrease in the number of problem banks and a reduction in enforcement actions in 2012 and 2013.”

The OCC conducts a quarterly analysis of community banks based on financial data from the Consolidated Reports of Condition and Income, also known as call reports.  In addition, the OCC gathers information about market conditions and industry health from its 21 locally based assistant deputy comptrollers in the Southern District which includes Alabama, Arkansas, Florida, Georgia, Louisiana, Mississippi, Oklahoma, Tennessee and Texas.  The analysis identifies current and potential risks facing the district’s national banks and federal savings associations and assists these institutions in proactively identifying and managing potential risks.

Significant themes and risks in the current economic environment are:

• Approximately 80 percent of district banks were in satisfactory condition at the end of the second quarter 2013, as the number of banks considered in troubled condition continued to decline steadily.
• Earnings improved because of reduced expenses for loan loss provision and real estate owned as a result of loan defaults.
• Pressure on bank earnings will continue to increase because of low loan demand, excess liquidity and declining investment yields.  
• Asset quality reflects improvement across all parts of the district, based on the most recent exams in the Southern District.  In addition, all regions in the Southern District show significant improvement in their Net Loan Loss ratios over the prior year period.  However, while credit metrics are improving, they are still weak relative to historical performance.  Problem assets held by banks in the central and eastern regions of the district remain above national averages.
• Capital levels, on average, improved slightly from the prior year for community national banks and thrifts. These ratios are strong from a historical perspective.  
• Most banks have ample liquidity.
• Oil and gas industry activity in Texas, Oklahoma and southern Louisiana is driving loan and deposit growth in many banks across that region of the district.   

Strategic risk is a principal concern as community banks need to define and implement strategies that will allow them to thrive in the face of lingering credit stress, historically low margins, and competitive pressures. Additionally, while credit risk is stable or declining, earnings are under increased pressure at community banks because of modest loan demand and limited availability of risk appropriate investment alternatives. In particular, OCC examiners are focused on the impact of increasing interest rates as many banks are extending loan and investment maturities in search of yield.

Loan growth remains mixed across the Southern District.  The western region of the district is reporting the strongest loan growth rate at 5 percent but the remainder of the district is reporting little or no loan growth.  Loan activity in the western region is fueled by banks located in areas experiencing economic growth resulting from increased oil and gas activity.  Loan portfolios were reduced in size in 38 percent of Southern District institutions.  These metrics reflect the continued competiveness of the market.

These factors have substantially increased strategic vulnerability as community banks seek to bolster income through new products and services, expansion of business lines and cost reductions, especially in critically important control functions such as audit and compliance.

“Good strategic planning and effective risk management processes are increasingly important in the current bank environment.  Examination activities will assess the adequacy of the strategic plan or business model, with specific emphasis on managing risks associated with new products and services,” said Mr. Barker.

Related Link

• OCC Factsheets (PDF)