Community Banks in Western States Grow Stronger, Agricultural Banks Performing Well

DENVER — Community banks and thrifts in the western part of the United States are growing stronger as housing, commercial real estate, agriculture and other key business sectors in that region continue to improve, officials from the Office of the Comptroller of the Currency (OCC) said today.

“The OCC is seeing positive changes in commercial real estate, the number of problem community banks is down and continues to fall compared with last year, and the housing market continues to improve,” said Kay Kowitt, the OCC’s Western District Deputy Comptroller.

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 the 15 locally based Assistant Deputy Comptrollers in the Western District.  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 77 percent of district banks are highly rated, 1 and 2 category banks as of the end of the first quarter 2013, up from the low point of 64 percent in the latter half of 2010.
• Most financial performance metrics stabilized or improved modestly over the past two years.  Earnings have improved, largely because of reduced provisioning expenses, and capital levels are satisfactory overall.
• Although asset quality has improved, commercial credit continues to present the highest risk to bank earnings. While credit metrics show improving trends, they are still weak relative to historical performance.
• Most banks have ample sources of liquidity and moderate interest rate risk.
• The level of deposits in banks remains high.  This includes demand deposit accounts and money market savings.

Agricultural banks supervised by OCC’s Western District are performing well.  Currently, one third of banks have agricultural loan concentrations exceeding 100 percent of capital. Examinations in these banks indicate that underwriting remain sounds.  Commodity and farmland prices remain high in many areas. Crop insurance mitigated the effect of recent drought conditions, and farm profits remain healthy. At the same time, there are risks to take into account in the current economic environment.  Primary threats to farm profits and land values include rising interest rates, decreasing commodity prices, increasing input costs, continuing drought conditions, and changing government support programs.

“If there is one message the OCC wants to deliver to the agriculture-focused banks, it’s to prepare now during good times for potential downturns in the future,” said Ms. Kowitt.  “By preparing now, the banks will be better positioned to help their customers in times of stress.”

The OCC explained further that strategic risk is a concern as community banks need to define and implement strategies that allow them to thrive in the face of lingering credit stress, historically low margins, competitive pressures, and uncertainty about regulatory changes. Additionally, while credit risk is stable to declining, earnings are under increased pressure at community banks because of modest loan demand and lack of risk appropriate higher-yield investment alternatives.

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.

Related Link

• OCC Factsheets (PDF)