Iowa-chartered banks end third quarter with increase in active loans, lower net income

JOHNSTON, IOWA (Dec. 2, 2022) — In the third quarter, the Iowa banking industry demonstrated strength and met Iowans’ financial needs amidst persistent inflationary pressures and rising interest rates, according to data released Thursday by the Federal Deposit Insurance Corp. At Iowa banks, loan growth continued and asset quality measures remained favorable.

“Iowa banks continue to increase lending to our communities even as we navigate inflationary pressures and rising interest rates. Although provisions for expected credit losses are rising, loan delinquencies have behaved to date,” said John Sorensen, president and CEO of the Iowa Bankers Association. “Iowa bankers will continue to monitor economic circumstances to advise their clients as they plan their financial futures.”

Iowa Banking Results

Net income for Iowa banks was $1.07 billion through the first three quarters of 2022 — down 6.3%, or $72 million, from the same period in 2021. The decline of Iowa banks’ net income is due to an increase in provisions, which are set aside by institutions to protect against future loan losses, Sorensen said. 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.

Iowa-domiciled banks reported $76.2 billion in active loans on their books as of Sept. 30, an increase of 11.9% from the prior year. The quality of these loans remained strong, as net loan charge-offs were 0.02% of total loans outstanding, a slight decline from 0.03% the year prior. At 0.42%, the noncurrent percentage of total loans is down from the third quarter 2021 percentage of 0.61%.

Total deposits at Iowa banks were $101.8 billion as of Sept. 30, up 6.8% from third quarter 2021 when deposits totaled $95.3 billion.

Return on assets (ROA), another indicator of overall bank performance, declined to 1.22% from 1.39% at the end of third quarter 2021. Iowa-chartered banks’ total assets amounted to $118.3 billion at the end of third quarter 2022.

National Banking Results

Overall, the FDIC reported Thursday that key banking industry metrics remain favorable at this time. Loan growth continued, net income grew nationally and asset quality measures remained favorable, despite a rise in early delinquencies. Further, the industry remains well-capitalized and highly liquid.

At the same time, the FDIC said, the banking industry continues to face downside risks resulting from economic uncertainties, inflationary pressures, rising interest rates and geopolitical concerns. These factors could hamper bank profitability, weaken credit quality and capital, and limit loan growth. These risks will be matters of continued supervisory attention by the FDIC over the coming year.

Net operating revenue nationally increased 7.6% from second quarter 2022 to $245.4 billion. Net interest income as a percentage of average assets increased from the second quarter but remains slightly below the pre-pandemic level largely due to strong asset growth during the pandemic.

Total loan balances grew for a sixth consecutive quarter, the FDIC said. Loan growth for the industry exceeded the pre-pandemic average pace without adjusting for the reduction in Paycheck Protection Program loan balances.

The banking industry reported growth in several loan portfolios from the year-ago quarter, led by commercial and industrial loans, one-to-four family residential mortgages and consumer loans. Loan balances grew 9.9% from the previous year for the banking industry, the highest annual growth rate reported since second quarter 2006.

Community banks reported stronger loan growth, increasing 12.2% year over year, the FDIC said. Commercial real estate loan portfolios continued to drive annual loan growth for community banks.

PPP loan payoffs and forgiveness continued to affect loan growth rates nationally. Excluding the effects of PPP loan payoffs, the annual loan growth rate would have been 11.6% for the industry and 15.7% for community banks, the FDIC said.

Nationally, deposits declined for a second consecutive quarter, according to FDIC data. A reduction in uninsured deposits was the primary driver of the quarterly decline while there was a small increase in insured deposits. Deposits totaled $19.4 trillion, down 1.1% from the level reported in the second quarter. While this reduction slightly offsets the unprecedented growth in deposits reported during the pandemic, total deposits are still well above pre-pandemic levels.

The FDIC reported that the number of banks across the nation on its problem list increased by two from the previous quarter to 42 banks. However, total assets held by problem banks declined $5.7 billion to $163.8 billion in the third quarter. The number of problem banks remains near record low levels. No banks failed in the third quarter.

The Deposit Insurance Fund balance was $125.5 billion as of Sept. 30, up about $1 billion from the second quarter. The DIF reserve ratio — the fund balance relative to insured deposits — remained unchanged at 1.26% as of Sept. 30 when compared to last quarter, the FDIC said. This is one basis point lower than a year ago, when the reserve ratio was 1.27%.