Iowa-chartered banks remain strong despite economic uncertainty and inflationary pressures
JOHNSTON, IOWA (Sept. 8, 2023) — Despite Federal Reserve efforts to slow economic growth to lower inflationary pressures, the banking industry continues to produce favorable performance results both nationwide and in Iowa. Iowa banks had a positive second quarter with strong growth in active loans and total assets, and they continued to show adequate liquidity, according to data released Thursday by the Federal Deposit Insurance Corp.
“Like the customers we serve, Iowa banks continue to demonstrate strength and resiliency as we navigate this higher interest rate environment,” said John Sorensen, president and CEO of the Iowa Bankers Association. “A year-over-year 10% increase in statewide loan balances would indicate continued investment and healthy economic activity in Iowa communities.”
Iowa Banking Results
Iowa-domiciled banks reported $81.2 billion in active loans on their books as of June 30, an increase of 10.4% from the prior year. The quality of these loans continued to be strong, as net loan charge-offs stayed stable at 0.02%, which is the same as second quarter 2022. At 0.45%, the noncurrent percentage of total loans is down slightly from the second quarter 2022 percentage of 0.46%.
Total deposits at Iowa banks were $102 billion as of June 30, similar to second quarter 2022 when deposits totaled $101 billion.
Second quarter year-to-date net income for Iowa banks was $644 million, a decrease of 5%, compared to the same period in 2022. The slight year–over–year decline of Iowa banks’ net income is due to low net interest margins and a significant increase in provisions, which are set aside by institutions to protect against future loan losses. 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 1.06% from 1.17% at the end of second quarter 2022. Iowa-chartered banks’ total assets amounted to $122 billion at the end of second quarter 2023.
National Banking Results
Nationally, the FDIC reported Thursday that the banking industry showed continued resilience in the second quarter as it remains well capitalized and has reported stable asset quality metrics and high net income. The FDIC did note that banks reported tightening interest margins and funding pressures for a second consecutive quarter.
Even though the U.S. economy has remained on solid footing, the banking industry continues to face significant downside risks from the effects of inflation, rising market interest rates and geopolitical uncertainty, according to the FDIC. These risks could cause credit quality and profitability to weaken, potentially resulting in a further tightening of loan underwriting, slower loan growth, higher provision expenses and liquidity constraints. Given these risks, the FDIC will be focused on monitoring the condition of the banking industry and taking appropriate supervisory actions.
The banking industry’s net income was $70.8 billion, a decrease of 11.3% from the first quarter 2023. After excluding the effects on incomes related to the acquisition of three failed banks in 2023, quarter-over-quarter net income would have been roughly flat for the second consecutive quarter, the FDIC reported. According to FDIC data, this adjusted level of net income remains relatively high by historical measures and was 5.7% higher than the same quarter one year ago. Comparatively, community bank net income rose 3.4% from the previous quarter and 0.7% higher than second quarter 2022.
Nationally, total loan and lease balances increased by 0.7% to $86.5 billion from the previous quarter. The FDIC reported that loan growth was driven by a 4.6% increase in credit card loans and a 3.2% rise in loans to nondepository financial institutions. Total loan and lease balances increased year-over-year by 4.5% to $526.8 billion.
Community banks reported stronger loan growth with a 2.6% increase in loan balances from the previous quarter and a 12.5% percent increase from the prior year. This growth was led by one-to-four family residential mortgages and nonfarm, nonresidential commercial real estate mortgages.
Nationally, deposits declined for a fifth consecutive quarter, according to FDIC data. However, deposit outflows moderated substantially from what was reported in the second quarter when two regional banks failed. Deposits totaled $18.6 trillion, down 0.5% from the level reported in the first quarter. The decline in total deposits was nearly offset by increased wholesale funding, which rose 1.5% from the previous quarter.
The number of banks on the FDIC’s “problem bank list” was unchanged at 43 banks, and total assets held by problem banks were $46 billion, down $12 billion from the first quarter. Two banks opened, one failed and 27 institutions merged in the second quarter.
The Deposit Insurance Fund balance increased to $117 billion on June 30, an increase of $897 million from the end of the first quarter. The DIF reserve ratio — the fund balance relative to insured deposits — decreased by 1 basis point to 1.1%. Despite the decline, the FDIC said the reserve ratio currently remains on track to reach the 1.35% minimum reserve ratio by the statutory deadline of September 2028.