Midwestern community banks are in their best financial condition since early 2009, the Office of the Comptroller of the Currency said in a May 13 report.

The OCC said that 85% of banks in its nine-state Central District scored top ratings in its assessment of their 2013 performance. The agency scored banks on several factors, including capital, assets, management, earnings, liquidity and risk sensitivity.

The agency identified 72 banks as "problem banks," down from a peak of 146 in 2011, following the financial crisis. Community banks in Chicago and Minneapolis saw the largest improvements, due to a reduction in nonperforming loans and chargeoffs.

"Improvements in the real estate market and overall economic conditions have helped banks to work out of problem assets," said Nathan Perry, assistant deputy comptroller for the OCC in Schaumberg, Ill.

Aggregate lending in the region grew by 4%, driven by increases in commercial and multifamily loans in Indianapolis, Minneapolis, central Illinois and Ohio.

Despite the improvements, the OCC report predicted that banks "may be challenged to further improve their profitability in the near term." Income measures were flat across the region for return on assets and equity. Additionally, nearly half the banks in the Central Region saw a net interest margin decline of at least 20 basis points from a year earlier.

The agency also cited a number of risks facing the region, a including "heightened concern" of credit risk, given a recent relaxation of underwriting terms.

The OCC's Central Region includes 491 banks in Illinois, Indiana, Kentucky, Michigan, Minnesota, Missouri, North Dakota, Ohio and Wisconsin.

The OCC released its report on banks in its Western district in February and in its Southern district last month. It plans to release a report on Northeastern banks in September.

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