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FDIC Results Show Iowa Banks in Strong Position Despite Economic Challenges

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

JOHNSTON, IOWA (Sept. 12, 2022) — In the second quarter, the Iowa banking industry demonstrated strength and met Iowans’ financial needs while navigating the challenges presented by inflationary pressures and rising interest rates, according to data released Thursday by the Federal Deposit Insurance Corp.

“Iowa banks are in strong position to continue supporting our economy during a challenging period,” said John Sorensen, president and CEO of the Iowa Bankers Association. “We are experiencing robust loan demand from consumers and businesses; meanwhile the pandemic-fueled surge in deposits is beginning to wane. Our banks remain well-capitalized and highly liquid.”

Iowa Banking Results

Net income for Iowa banks was $680 million through the first two quarters of 2022 — down 10.4%, or $79 million, from the same period in 2021. The FDIC said the national decline of banks’ net income is due to 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. At community banks, increasing labor costs also reduced earnings for the period, according to the FDIC.

Iowa-domiciled banks reported $72.8 billion in active loans on their books as of June 30, an increase of 7.54% from the prior year. The quality of these loans remained strong, as net loan charge-offs were 0.02% of total loans outstanding, a decline from 0.05% the year prior. At 0.46%, the noncurrent percentage of total loans is down from the second quarter 2021 percentage of 0.68%.

Total deposits at Iowa banks were $101.4 billion as of June 30, up 9.4% from second quarter 2021 when deposits totaled $92.7 billion. However, deposits are starting to trend down slightly from the previous quarter, which closed at $102 billion on March 31.

Return on assets (ROA), another indicator of overall bank performance, declined to 1.17% from 1.4% at the end of second quarter 2021. Iowa-chartered banks’ total assets amounted to $116.8 billion at the end of second quarter 2022.

National Banking Results

Overall, the FDIC reported Thursday that key banking industry metrics remain favorable at this time. Loan growth strengthened, net interest income grew, and most asset quality measures improved, 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 prevailing economic uncertainties, inflationary pressures, a rising interest rate environment and geopolitical concerns. These factors could hamper bank profitability, weaken credit quality and capital, and limit loan growth, and they will be matters of continued supervisory attention by the FDIC over the coming year.

Net operating revenue nationally increased 6.2% from first quarter 2022 to $228 billion. Net interest income as a percentage of average assets increased 22 basis points from the first quarter to 2.54% but remains below pre-pandemic level.

Total loan balances grew for a fifth consecutive quarter, despite continued payoff and forgiveness of Paycheck Protection Program loans, the FDIC said. Loan growth for the industry exceeded the pre-pandemic average pace without adjusting for the reduction in PPP loan balances.

The banking industry reported growth in several loan portfolios from the year-ago quarter, led by consumer loans, primarily credit card loans. Loan balances grew 8.4% from the previous year for the banking industry, the highest annual growth rate reported since first quarter 2008.

Community banks reported a 4.9% increase in loan balances from the previous quarter and a 7.7% increase in loan balances from the prior 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 limit loan growth rates nationally. Excluding the effects of PPP loan payoffs, the annual loan growth rate would have been 11.5% for the industry and 14% for community banks, the FDIC said.

Nationally, deposits declined for the first time since 2018, according to FDIC data. A reduction in uninsured deposits was the primary driver of the quarterly decline, although there was also a small reduction in insured deposits. Total deposits are still well above pre-pandemic levels. As of the second quarter, deposit levels remain elevated at 82.4% of total assets, higher than the pre-pandemic average of 76.7%.

The FDIC reported that the number of banks across the nation on its problem list is unchanged from the previous quarter at 40 banks. Total assets held by problem banks declined slightly in the second quarter and the number of problem banks continues to be at its lowest level since FDIC Quarterly Banking Profile data began in 1984. No failures occurred in the second quarter.

The Deposit Insurance Fund balance was $124.5 billion as of June 30, up about $1.4 billion in the second quarter. The DIF reserve ratio — the fund balance relative to insured deposits — rose by 3 basis points to 1.26% as of June 30, the FDIC said.

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