Iowa-chartered banks see loan growth and steady deposit levels in third quarter despite continued economic uncertainty
JOHNSTON, IOWA (Nov. 30, 2023) — Data released Wednesday by the Federal Deposit Insurance Corp. showed the nation’s banking system remains stable and resilient, despite continued economic uncertainty, rising interest rates and funding pressures.
“Despite a challenging interest rate environment resulting from the Federal Reserve’s war on inflation, Iowa banks are growing loans and maintaining deposit levels,” said John Sorensen, president and CEO of the Iowa Bankers Association. “More importantly, they continue to help grow our economy through time-tested relationships with Iowa’s small businesses, farmers and consumers.”
Iowa Banking Results
Iowa banks experienced healthy loan growth for the quarter ended Sept. 30. The 246 banks domiciled in Iowa reported $82.9 billion in active loans on their books, an increase of 8% from the prior year. Credit quality remained strong, as net loan charge-offs remained well below 1% at just 0.04%, and the non-current percentage of total loans was 0.52%. Although both have increased slightly, they remain near historic lows.
Total assets, primarily consisting of loans and investments, exceeded $122 billion for the period. Following rapid increases in deposits during the pandemic, Iowa banks experienced little change from the prior year, finishing the quarter with $101.6 billion.
Year-to-date net income for Iowa banks was $949 million, an 11% decrease from the prior year. The decline is due to lower net interest margins and an increase in loan loss provisions. The increase in provision expense reflects the banking industry’s recognition of risks related to persistent economic uncertainties and slowing economic growth, as well as the increase in loan balances.
Average return on assets (ROA), another indicator of overall bank performance, decreased to 1.04% from 1.22% at the end of third quarter 2022.
National Banking Results
FDIC Chairman Martin Gruenberg reported, “The banking industry continues to show resilience in the third quarter. Net income remained high, overall asset quality metrics remained favorable, and the industry remained well capitalized. The banking industry still faces significant downside risks from the continued effects of inflation, rising market interest rates, and geopolitical uncertainty. In addition, deterioration in the industry’s commercial real estate portfolio is beginning to materialize in office properties. These issues, together with funding and earning pressures, will remain matters of ongoing supervisory attention by the FDIC.”
The industry’s net income in Q3 was $68.4 billion, down 3.4% from the previous quarter. The decline in net income was driven by lower noninterest income and higher realized losses on securities. First and second quarter income was also impacted by the acquisition of three failed large banks. The FDIC reported that if not for these one-time gains, net income would have been flat over the past year. Comparatively, community banks also reported a decrease in net income declining 4.8% from the previous quarter and 15% from third quarter 2022. This decrease was primarily due to higher noninterest expense and lower net interest income. Higher salaries, benefits expense, data processing and other expenses contributed to the increase in noninterest expense for community banks, and the increased cost of funds and deposits continues to impact net interest income.
Deposits declined nationally for the sixth consecutive quarter to $18.6 trillion. However, community banks saw a 1% increase in deposits in quarter three with 53.3% of community banks reporting an increase in deposit balances, according to FDIC data.
Nationally, the industry continues to see loan growth, with total loans of $12.3 trillion at quarter end, an increase of 0.4% from the previous quarter. Much of the national loan growth can be attributed to credit card loans, up 12.7% from third quarter last year. Community bank loan growth remained steady with a 9.8% increase from the prior year. Residential real estate and nonfarm, nonresidential commercial real estate (CRE) loans led the quarterly and annual lending growth for community banks.
The number of banks on the FDIC’s “problem bank list” increased by one to 44 banks, and total assets held by problem banks were $53.5 billion, up $7.5 billion from the second quarter. The FDIC reported, “Two banks opened, one bank failed and 28 institutions merged during the quarter.”
The Deposit Insurance Fund balance increased to $119.3 billion on Sept. 30, an increase of $2.4 billion from the end of the second quarter. The DIF reserve ratio — the fund balance relative to insured deposits — increased by 2 basis points to 1.13%. The FDIC noted that based on projections, “the reserve ratio remains on track to reach 1.35% by the statutory deadline.”