Iowa banks’ favorable capital and liquidity levels enabled them to effectively support businesses, farmers and consumers with lending and other critical financial services
JOHNSTON, IOWA (June 16, 2020) — The COVID-19 pandemic adversely affected several industry sectors and financial markets, but the Iowa banking industry has proven to be a source of strength for the state’s economy, according to first quarter results released Tuesday by the Federal Deposit Insurance Corp.
Though bank earnings were negatively affected by increases in loan loss provisions, Iowa bank capital and liquidity levels remained strong. Iowa-chartered banks continued to support the state’s economic development with $65.2 billion in active loans on their books as of March 31, 2020, up 4.3% from the prior year. And in the first quarter, net loan charge-offs were down to 0.08%, compared to 0.12% last quarter. At 0.85%, the noncurrent loan percentage of total loans is up from the first quarter 2019 percentage of 0.72%.
“The first priority for Iowa banks is to care for their communities,” said IBA President and CEO John Sorensen. “It’s why we delivered over 55,000 Paycheck Protection Program loans to Iowa small businesses, hospitals and farms — helping to preserve 750,000 jobs during the past two months alone. We entered the pandemic in a position of strength, and we have the capacity necessary to drive the economic renewal that lies ahead.”
On Tuesday, the FDIC reported 2020 first quarter banking results, which showed that nationally the banking industry has proven to be a source of strength for the economy in spite of the economic downturn that adversely affected several industry sectors and financial markets. Banks effectively supported individuals and businesses during this downturn through lending and other critical financial services, even though bank earnings were negatively affected by increases in loan loss provisions. Also, the FDIC reported that nationally loans and deposit inflows increased dramatically, reflecting drawdowns on corporate lines of credits and the flight to liquid assets during the market volatility.
“The FDIC was born out of a crisis, and we now find ourselves in the midst of another unprecedented period,” said FDIC Chairman Jelena McWilliams. “During the last month of the first quarter, the COVID-19 pandemic led governments across the world to take emergency actions, including widespread stay-at-home orders that temporarily shut down large portions of the global economy. Notwithstanding these disruptions, at the end of the first quarter, bank capital and liquidity levels remain strong, asset quality metrics are stable and the number of ‘problem banks’ remains near historic lows.”
Community banks across the nation also reported lower profits than a year ago, primarily as a result of higher provision expenses. However, community banks’ net operating revenue increased, annual loan growth rate was strong and asset quality metrics remained stable, the FDIC said.
With the Federal Reserve cutting the Fed Funds rate near zero in March, the low interest rate environment combined with the economic downturn will present challenges to the industry over the near to mid-term, the FDIC reported. “Community banks are particularly vulnerable to fluctuating interest rates, as nearly half of their assets mature or reprice in three or more years,” the FDIC said.
Community banks continued to see deterioration in agriculture loan portfolios during first quarter 2020. While the net charge-off rate for agriculture loans remained low, noncurrent rates increased in both farmland and agricultural production loan categories. “The community bank farmland noncurrent rate rose 24 basis points year over year to 1.75% and the agricultural production loan noncurrent rate rose 25 basis points to 1.19%,” the FDIC said.
Nationally, almost all major loan categories reported quarterly increases, the FDIC reported. Commercial and industrial loans reported the largest quarterly dollar increase of $339.4 billion, with most of the growth concentrated among the largest financial institutions. Additionally, unfunded commercial and industrial loan commitments dropped $269.6 billion as some corporate borrowers drew down their lines as a precautionary measure against the economic downturn. Loan growth at community banks also was strong, with total loan volume rising by 5.8% from a year ago. The annual increase was led by growth in the commercial real estate loan portfolio, commercial and industrial loan portfolio and residential mortgages.
Deposit growth surged nationally in response to the economic uncertainty in March. Deposits rose by $1.2 trillion in first quarter from the previous quarter, the FDIC said. On an annual basis, national deposits grew by 13.3%, the largest year-over-year growth rate ever reported by the FDIC’s Quarterly Banking Profile. In Iowa, total bank deposits ended the first quarter at $76.7 billion, up 5.41% from first quarter 2019. “With rising deposits, the banking industry’s liquidity strengthened, as cash and due from balances increased,” the FDIC said.
The number of banks across the nation on the FDIC problem list increased from 51 to 54 during the first quarter, the first quarterly increase since 2011. However, the number of problem banks remains near historic lows, the FDIC said. Changes to the number of insured institutions include two new banks that opened during the first quarter, 57 banks absorbed by mergers and one bank failed.
The FDIC Deposit Insurance Fund, supported by bank premiums, rose by $2.9 billion from the end of last quarter to $113.2 billion. The increase in the fund was mainly driven by unrealized gain on available-for-sale securities and assessment income, followed by interest earned on investment securities held by the DIF, the FDIC reported. Estimated insured deposits were $8.2 trillion at the end of March, an increase of 4.5% from last quarter.
First quarter net income for the Iowa banking industry was $243 million on March 31, 2020 — down 8.3% from the previous year’s first quarter — and total assets were $93.3 billion. Return on assets (ROA), another indicator of overall bank performance, declined to 1.05%, compared to 1.21% at the end of first quarter 2019.