Nine Central District States Show Improvement in the Community Banking Sector Office of the Comptroller of the Currency Analysis Shows

CHICAGO — Financial performance of the community banking industry in nine Central District states is improving and the number of problem banks has fallen, according to the Office of the Comptroller of the Currency.

At the same time, bank earnings, on the mend for several quarters due to improving asset quality and reduced provision expenses, remain under pressure as a result of low interest rates and asset yields, compressed margins, and heavy competition for quality assets, said agency officials during a conference call with regional reporters.  

These are among the findings of the OCC’s fourth quarter 2012 risk analysis covering the nine states that make up the agency’s Central District.  OCC’s Central District covers seven states (Illinois, Indiana, Kentucky, Michigan, North Dakota, Ohio, and Wisconsin) and parts of two others (Minnesota and Missouri).

“The trend lines are improving, something we’ve been seeing since early 2011 when the number of problem banks began to fall,” said District Deputy Comptroller Bert Otto.   “The number of better capitalized banks has improved; we’re seeing more banks emerge from credit problems, and commercial vacancy rates are improving across the region.  Community banks and thrifts are working aggressively to address current and prospective risks.”  

“Overall, we’re seeing some pressure on community banks which are experiencing still narrow net interest margins.  As community banks strive to offset lower revenues with new products, new services, or higher yielding investments, strategic risk will be a focus during upcoming bank examinations,” Otto said.  

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 input from our managers throughout the district, in addition to our lead expert group, contributes greatly to our dynamic Risk Committee process,” said Risk Committee Chairman and District Risk Officer John Meade.

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.

Other highlights from the analysis include: 

• As of December 31, 2012, 110 national banks and federal savings associations have agricultural loan concentrations exceeding 100 percent of capital.  Examinations of these portfolios are noting evidence of generally sound underwriting, however. 
• Return on equity for most banks improved year-over-year, though the net interest margin continues to compress.  Much of the profitability improvement has resulted from reduced provisions for loan loss expenses. 
• The number of problem banks in the district fell to 106 at the end of 2012, compared with 142 at the end of 2011. 
• While credit risk remains a concern for community banks, the OCC is seeing more banks emerge from their credit problems looking for growth.  This growth may come from new or existing markets, customers, services, or products.  Strategic risk is a concern to OCC as banks need to fully understand the impact of their strategies. 
• Commercial vacancy rates generally fell across the district while commercial property values increased over the last year.  As with other geographic regions, commercial real estate values are improving slowly. 
• 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 commercial properties owned by the bank frequently as the result of a foreclosure.

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

Related Link

• State Fact Sheet (PDF)