OCC Urges Caution as Lending Surges Across Southern U.S.

Community banks in the South are nearly as healthy as were before the financial crisis, but the hunt for short-term profit could set them up for trouble, according to Office of the Comptroller of the Currency officials.

Strong loan growth and better asset quality has helped community banks in the OCC's nine-state Southern District, which stretches from Texas to Florida. The agency said that 89% of OCC-supervised lenders in the region received a well-regarded 1 or 2 CAMELS rating, compared to 70% three years ago, and lending throughout the region grew by an average rate of 6% compared to a year earlier.

"The condition of the 468 community institutions in our Southern District is good," Gil Barker, deputy comptroller for the district, said during a conference call Tuesday. "Key financial indicators like loan growth and capital are favorable, the number of problem banks is declining and the housing market is improving in most of the markets in our district."

The strong performance was aided by the energy boom in Texas and Oklahoma and slowly improving health in states such as Florida and Georgia that were hit hardest by the recession.

But the OCC said it is witnessing instances of banks taking on risks as they hunt for yield, by loosening loan terms and adding long-term, low-yielding assets. Moreover, the fastest-growing banks have not added to their loan-loss provisions as quickly as in the past, the regulator said.

"Our concern is that the anxiety for income that exists today will lead to improperly managed concentration levels or expansion of products that were at the heart of the last downturn," Barker said.

Concerns about banks reaching for yield are not limited to the region covered in the OCC's report.

"I worry that our low interest rate policy might foster asset price bubbles in coming years," James Bullard, president and chief executive of the Federal Reserve Bank of St. Louis, said during a media briefing last week.

Oklahoma and Texas were among the fastest-growing states in the South. Houston stood out with 12% loan growth compared to a year earlier. But those states' reliance on the energy industry raises concerns — particularly with oil prices expected to fall — about concentration risk, and the possibility of a repeat of the boom-and-bust cycles of the 1980s.

Barker said he feels that energy-focused bankers are heeding the agency's warnings to be conservative.

"We constantly remind the banks about the bust times that occurred in the 80s, and fortunately, a lot of Texas bankers have long memories," Barker said, adding that bankers "know there will be a downturn in oil prices as some point, and they are preparing for it."

The OCC is similarly concerned about the resurgence of the Florida real estate market, but remains optimistic that bankers have learned their lessons from the last crisis. Strong commercial real estate and commercial and industrial lending helped banks in Miami post 10.5% annual loan growth, one of the fastest rates in the district.

The possibility that Florida banks could again get into trouble with CRE is "on our radar screen," said Oscar Harvey, associate deputy comptroller for the district, though he added that the OCC has "done a good job of making sure the institutions that are engaged in it understand the risks associated with it."

Operational risks are on the rise, the OCC said. Cost-cutting has contributed to a "tremendous" increase in fraud, Barker said. He's seen a surge in high-tech and traditional bank fraud as institutions pare back compliance departments to earn higher profits.

"Earnings pressures are causing banks to make cuts in their staffing and non-revenue-producing areas, and that's resulting in increased incidents of fraud," Barker said. "I think community bankers are placing more confidence in the integrity of the employees than in the integrity of their audit and internal control processes."

While strategic, operational and compliance risks are rising, the OCC sees less cause for concern over interest-rate risk and credit risk. Rate risk is substantial but "controlled," Harvey said.

The Southern District encompasses Alabama, Arkansas, Florida, Georgia, Louisiana, Mississippi, Oklahoma, Tennessee and Texas.