Community Banks' Performance in Midwest Improves, Chicagoland Institutions Stabilize as Credit Quality Rebuilds

CHICAGO — National banks and federal savings associations located in nine Midwestern and upper Midwestern states continue to report better earnings compared with 2012 as a result of improving credit quality, the Office of the Comptroller of the Currency reported today in the agency’s second quarter 2013 risk analysis. In addition, the condition of national banks and federal savings associations in the Chicago area is stabilizing, with the number of problem institutions falling modestly since last year.  

The analysis covers nine states in the OCC’s Central District: Illinois, Indiana, Michigan, North Dakota, Ohio, Wisconsin, most of Kentucky and Minnesota, and the eastern third of Missouri.

“The trends reflect continued improvement, and we expect further reductions in the number of problem banks,” said OCC District Deputy Comptroller Bert Otto.   “Efforts to strengthen bank capitalization and profitability have been successful to date, though additional work remains.  As a result of this progress, more of our banks are looking to increase lending activity in their communities.  Many have been able to achieve growth in commercial loans as we’ve seen volume pick up there in recent quarters,” Mr. Otto reported.  

Financial performance and condition through much of the district had been improving the last two years, with the recovery in Chicago lagging.  However, conditions in northeastern Illinois are now looking up, with fewer delinquencies, lower loan losses and improved capital levels.  These factors have led to a reduced number of institutions identified by examiners as problems, which require heightened supervision.  “Community banks and thrifts throughout the District have made good strides to further bolster their balance sheets and risk systems.  Our examiners will continue to work with these institutions in an effort to see the improving trends sustained,” Mr. Otto noted.

The analysis is developed quarterly by the OCC’s Central District’s Risk Committee which analyzes financial data from the Consolidated Reports of Condition and Income, also known as the “Call Report,” in addition to input from the 18 local Assistant Deputy Comptrollers.  The analysis identifies current and potential risks facing the district’s national banks and savings institutions and assists banks in proactively identifying and managing potential risks.

The risk analysis also reveals that rapidly growing bank portfolios have historically been a concern as the growth often strains capital and risk management system support.  

“Our examiners will closely monitor credit risk selection and underwriting at upcoming exams, particularly in those banks growing their commercial loans rapidly, to ensure standards aren’t being inappropriately compromised,” said OCC Risk Committee Chairman and District Risk Officer John Meade.

Other highlights on the condition of the OCC’s Central District banks include: 

• Return on assets for most banks was flat year-over-year, with continued net interest margin compression largely offset by lower provision for loan loss expenses. 
• The number of problem banks in the district fell to 84 at June 30, 2013, down from 106 at the end of 2012 and 142 at the end of 2011. 
• While credit risk management remains a concern, the OCC is seeing more banks emerge from their credit challenges and are focusing on growing.  Growth may come from acquisitions, expanded or new markets, customers, services, or products.  Strategic risk remains a concern to OCC as bank planning needs to be cohesive, communicated well, and commensurate with staff and system capabilities.
• As of June 30, 2013, 104 national banks and federal savings associations had agricultural loan concentrations exceeding 100 percent of capital.  Our examinations have generally found these agriculture bank portfolios to be underwritten soundly, alleviating some of the concern with the concentration level.
• Commercial real estate values are continuing to slowly improve. CRE fundamentals remain mixed across the Central District in terms of vacancy rates and income levels.  The Chicago and Indianapolis markets reflect more favorable performance, while properties in the Cleveland and Detroit markets have lagged.
• The volume of Other Real Estate Owned (OREO) is stable but remains high with over 80 percent of the district’s banks and thrifts reporting OREO balances. OREO is the term bankers use to describe residential and commercial real estate properties owned by the bank, frequently as the result of a foreclosure.

The OCC’s Central District supervises 526 community banks and savings institutions which hold a national charter and range in size from $3 million to $11 billion.  Combined, the national banks and federal savings associations in the OCC Central District hold $192 billion in assets.

For a breakout of conditions in each of the nine states, please see the attached fact sheets containing state specific information.

Related Link

• State Fact Sheets (PDF)