Iowa-chartered banks begin year with increases in active loans and deposits despite industry stress
JOHNSTON, IOWA (June 2, 2023) — Despite the recent period of bank industry stress nationally, Iowa banks reported a strong first quarter with growth in active loans, favorable liquidity and a slight increase in deposits, according to data released Wednesday by the Federal Deposit Insurance Corp.
“Iowa banks have proven to be strong and resilient during this recent period of stress,” said John Sorensen, president and CEO of the Iowa Bankers Association. “The year-over-year increase in Iowa bank deposits signifies Iowans’ continued trust in local banks who put customer relationships and community first.”
Iowa Banking Results
Iowa-domiciled banks reported $79.4 billion in active loans on their books as of March 31, an increase of 12.9% from the prior year. The quality of these loans continued to be strong, as net loan charge-offs increased slightly to 0.03% of total loans, compared to 0.02% from first quarter 2022. At 0.39%, the noncurrent percentage of total loans is down from the first quarter 2022 percentage of 0.52%.
Total deposits at Iowa banks were $103 billion as of March 31, up 1% from first quarter 2022 when deposits totaled $102 billion.
First quarter year-to-date net income for Iowa banks was $321 million, a decrease of less than 1%, or just $3 million, compared to the same period in 2022. The slight year–over–year decline of Iowa banks’ net income is due to lower net interest margins and an 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 1.11% at the end of first quarter 2022. Iowa-chartered banks’ total assets amounted to $121.4 billion at the end of first quarter 2023.
National Banking Results
Overall, the FDIC reported Wednesday that the banking industry has proven to be resilient. In the first quarter, asset quality metrics remained favorable and the industry remains well capitalized. However, the FDIC noted that first quarter results do not yet fully reflect the stress that began in early March.
The FDIC said the banking industry also faces significant downside risks from the effects of inflation, rising market interest rates, slower economic growth and geopolitical uncertainty. These risks have the potential to weaken credit quality and profitability and could result in further tightening of underwriting, slower loan growth and higher provision expenses. Given these risks, the FDIC will be focused on monitoring the condition of the banking industry, including the impacts of the recent bank failures on liquidity, and taking appropriate supervisory actions.
Net operating revenue nationally increased 7.6% from fourth quarter 2022 to $261.7 billion. After three consecutive quarters of increase, net interest income as a percentage of average assets declined relative to the fourth quarter, but it still exceeds the pre-pandemic average.
Both loan yields, the interest banks charge on loans, and deposit costs, the interest banks pay on deposits, began to increase in the second quarter of 2022 when market interest rates began to increase rapidly. Loan yields increased significantly more than deposit costs between second quarter 2022 and fourth quarter 2022. The FDIC said this trend reversed in the first quarter, as the banking industry reported that yields on loans increased by 32 basis points while the cost of deposits increased by 43 basis points. Over the course of the quarter, the industry reported a sizeable shift from lower-yielding accounts, such as transaction and savings accounts, into higher-yielding time deposits, which explains much of the increase in deposit costs.
Nationally, total loan balances declined modestly from the previous quarter. Loans transferred to the FDIC as receiver as a result of bank failures in the first quarter, combined with a seasonal decline in credit card balances, were the major contributors to the decrease in the balance of total loans, the FDIC said. The banking industry reported annual loan balance growth of 7.5% from the previous year, well above the pre-pandemic average. The growth was led by higher one-to-four family residential mortgages, consumer loans and commercial and industrial loans.
Compared to the industry, community banks reported stronger loan growth, increasing 1.8% quarter over quarter and 15% year over year, the FDIC said. Nonfarm, nonresidential commercial real estate loan portfolios and one-to-four family residential mortgages drove annual loan growth for community banks.
Loan growth has been robust during the last year, driven by pent-up demand from both consumers and businesses as well as higher inflation, the FDIC said. Recent surveys, however, indicate that demand is waning and underwriting standards are tightening, which may hinder loan growth rates in coming quarters.
Nationally, deposits declined for a fourth consecutive quarter, according to FDIC data. A reduction in uninsured deposits was the primary driver of the quarterly decline since insured deposits increased. Deposits totaled $18.7 trillion, down 2.5% from the level reported in the fourth quarter — the largest reduction reported in the FDIC Quarterly Banking Profile since data collection began in 1984.
The number of banks on the “problem bank list” increased by four from the previous quarter — reflecting movement from banks coming on and off the list — to 43 banks, and total assets held by problem banks were $58 billion, up $10.5 billion. Two banks failed in the first quarter.
The Deposit Insurance Fund balance was $116.1 billion on March 31, down $12.1 billion from the end of the fourth quarter. The DIF reserve ratio — the fund balance relative to insured deposits — decreased by 14 basis points to 1.11% due to loss provisions for actual and anticipated failures that reduced the fund balance, and strong growth in insured deposits. 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.