The Office of the Comptroller of the Currency released its 2013 second-quarter risk analysis for community banks and federal savings associations in the Midwest which revealed that the financial institutions in this region continue to report better earnings compared to a year ago due to improving credit quality.
The analysis covers nine states in the OCC’s Central District: Illinois, Indiana, Michigan, North Dakota, Ohio, Wisconsin, most of Kentucky and Wisconsin, and the eastern third of Missouri. Combined, the 526 community banks and savings institutions supervised by the OCC’s Central District hold $192 billion in assets.
Additionally, the volume of other real estate owned is stable but remains high with over 80% of the district’s banks and thrifts reporting OREO balance.
Meanwhile, 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 expense. Through June 30, the number of problem banks in the district fell to 84, down from 106 at the end of 2012 and 142 the year before.
“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.”
Otto added that more banks are looking to increase lending activity in their communities, as many have achieved growth in commercial loans as the volume within this category has increased in recent quarters. The OCC added that growth may also come from acquisitions, expanded or new markets, customers, services, or products.
The risk analysis also reveals that as bank portfolios grow rapidly, there has historically been a concern that this could strain 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 John Meade, OCC risk committee chairman and district risk officer.
