Economic Focus: Spotlight on Evansville Metro Bank Performance

Rajeev R. Bhaskar , Gary S. Corner

Evansville, tucked away in the southwest tip of Indiana, is the commercial, medical and service hub of the Illinois-Indiana-Kentucky tristate region. The Evansville metropolitan statistical area (MSA) is the 142nd largest in the United States and consists of four Indiana and two Kentucky counties.

Its strategic location on the Ohio River and close proximity to a number of large MSAs has helped build a broad economic base in the region known for stability and diversity. Major industries include manufacturing, warehousing and distribution, health care, education and financial services. Evansville is home to two universities, the University of Southern Indiana and Evansville University, which together enroll more than 13,000 students and add stability to the employment base.

Although much attention has been paid to economic issues in other areas of Indiana, such as Elkhart (unemployment rate of 17.5 percent), the downturn has affected Evansville, though to a lesser extent. The unemployment rate in the Evansville MSA
is 8.7 percent (May) compared with 10.6 percent in Indiana and 9.4 percent for the nation (as of August). Although Evansville does not appear to be experiencing any unique economic shocks, such as large factory closings or losses of company headquarters, it has not been immune to declining real estate values and elevated home foreclosures either.

Banking Analysis

The banking market of the Evansville MSA is made up of 12 locally headquartered banks, 16 banks headquartered outside of Evansville but with a presence in the MSA, and three thrifts. These institutions offer 146 branches in total. A measure of market competitiveness called the Herfindahl-Hirschman Index (HHI) indicates a moderate level of competition for the Evansville market.

Analysis of the aggregate performance of the 12 Evansville-headquartered banks appears to imply relative weakness for the overall market. The asset-weighted return on average assets (ROA) at Evansville banks averaged -0.33 percent in the first quarter, compared with 0.30 percent for peers. Aggregate numbers for asset quality, nonperforming loans and coverage ratio also indicate a weaker banking market compared with the peer markets in the Eighth District.

A look at individual bank performance within the Evansville market, however, reveals that 10 out of 12 banks are actually profitable, and unweighted average ROA is 0.42 percent. Furthermore, all banks have a positive earnings run rate, which means that their net interest income and fee revenue earned more than what covers their operating expenses.

In addition, significant losses at one institution appear to drag down the average profitability of the entire market. The institution with significant losses has a much higher concentration in commercial real estate (CRE) loans (42 percent of all loans) compared with the other Evansville banks. It also has the highest percent of nonperforming loans (7.8 percent), most of which are in the CRE portfolio. Most other banks in Evansville are performing well and have limited CRE exposure; so, there does appear to be an association between CRE exposure and bank performance. CRE portfolios at U.S. banks have witnessed higher loss rates in recent times than most other loan types.

In conclusion, economically the Evansville MSA has fared at par with its peer group in this economic downturn. Aggregate bank performance, at first glance, appears relatively weaker. But most banks in the MSA are actually performing well, with 10 out of 12 being profitable. Significant losses and weak performance at one bank have pushed the market's average performance metrics below peer markets. A closer examination of the individual bank performance seems to suggest an association between high CRE exposure and weak performance.

Intern Connie He provided data support.

Fact Sheet on Evansville, Ind.

Evansville, IN Peer Average*
Population 350,261 195,388
Estimated Annual Population Growth Rate 0.27% 0.97%
Unemployment Rate 8.7% 8.3%
Current Total Workforce 178,700 96,544
Current per Capita Income $34,376 $29,239

SOURCES: Bureau of Labor Statistics, Bureau of Economic Analysis, and Bureau of the Census

* Peer group consists of the 18 MSAs in the Eighth Federal Reserve District, excluding St. Louis, Memphis, Louisville and Little Rock.

A Comparison of Evansville Banks with the Other Eighth District Metropolitan Area Banks, Q1 2009

Evansville (metro) Peer Group Average
Number of Banks 12 7.8
Total Assets $12,804 million $65,409 million
Return on Assets -0.33% 0.30%
Nonperforming Loans/Total Loans 3.54% 2.68%
Loan Loss Reserves/Non Performing Loans 58.09% 62.02%
Tier 1 Leverage Ratio 7.47% 8.68%
CRE to Total Loans 24.25% 30.11%

SOURCES: Call Reports and Census Bureau. Numbers in red indicate unfavorable differences when compared with the averages of other metropolitan areas' banks.

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