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Third Quarter FDIC Report Shows Iowa Banks Continue to Demonstrate Resilience Through Pandemic

Iowa banks’ third quarter active loans up 9.1%, net income down 5.3% year over year

JOHNSTON, IOWA (Dec. 3, 2020) — The Iowa banking industry continues to demonstrate resilience despite continued economic challenges and uncertainty, as shown by third quarter results that the Federal Deposit Insurance Corp. released Tuesday.

“The performance of Iowa banks rises and falls with the economic health of the communities we serve. Like our small business customers, Iowa banks have shown resilience despite the pandemic-induced challenges and uncertainty we’ve all experienced,” said John Sorensen, president and CEO of the Iowa Bankers Association. “With hopeful vaccine news of late, we look forward to supporting the economic renewal 2021 may bring.”

Iowa Banking Results

Iowa-chartered banks continued to support the state’s economy with $69.4 billion in active loans on their books as of Sept. 30, an increase of 9.1% from the prior year. Despite the pandemic-induced economic challenges, Iowa bank credit quality ratios recorded only modest increases. In the third quarter, net loan charge-offs were up slightly to 0.10%, compared to 0.08% last quarter. At 0.93%, the noncurrent percentage of total loans is up from the third quarter 2019 percentage of 0.73%.

In addition to seeking access to credit, Iowans continued to turn to their banks to safeguard their money. Total deposits at Iowa banks were $84.6 billion at the end of third quarter this year, up 14.1% from the year prior when deposits totaled $74.2 billion.

Third quarter year-to-date net income for the Iowa banking industry was $836 million on Sept. 30 — down 5.3%, or $47 million, from the previous year’s third quarter. Return on assets, another indicator of overall bank performance, declined to 1.15% from 1.34% at the end of third quarter 2019. Iowa-chartered banks’ total assets amounted to $102.3 billion at the end of the third quarter.

National Banking Results

Nationally, the FDIC said the banking industry reported better results in the third quarter relative to the first half of the year, which coincided with the nation’s improved economic activity. Overall, the decline in net income has slowed and deposits have continued to grow, demonstrating the confidence that consumers and businesses have in the safety of the banking system, said FDIC Chairman Jelena McWilliams.

“The low interest rate environment, flat yield curve and continued economic uncertainties related to the trajectory of the COVID-19 pandemic will likely continue to exert downward pressure on revenue and challenge the banking industry over the near to medium term,” McWilliams said. “Nonetheless, the banking industry remains well capitalized with ample liquidity and has, to date, weathered the economic effects of the pandemic.”

Net operating revenue nationally remained relatively stable with a slight 3% reduction to $201.3 billion compared with a year ago. Net interest income fell for the fourth consecutive quarter, decreasing by 7.2% from a year ago — the largest decline in the history of the FDIC’s Quarterly Banking Profile reports. Net interest margin compression, resulting from continued downward pressure on earning asset yields, which continued to outpace the decline of average funding costs, drove this reduction, the FDIC said.

The third quarter report showed an $84.5 billion, or 0.8%, decline in loan balances that was driven by a reduction in commercial and industrial lending. The commercial and industrial loan portfolio fell by $150.3 billion (5.6%) from second quarter 2020. According to the FDIC, an increase in loans to nondepository financial institutions and 1-4 family mortgage loans partially offset the decline in commercial and industrial loan volume. Loan growth at community banks was positive for both the quarter and the year, the report showed. Loans increased 1% between second and third quarters, driven by an increase in nonfarm and nonresidential loans.

However, community banks nationally continued to face challenges in the agriculture sector, the FDIC reported Tuesday. The noncurrent rate for loans secured by farmland rose 26 basis points year over year to 1.73%, and the noncurrent rate for agricultural production loans rose 25 basis points to 1.21%.

Banks’ deposit growth stabilized during the third quarter and is now near the average rate of growth between year-end 2014 and year-end 2019 — prior to the surge in deposit levels reported during the first half of 2020. Total deposits increased by $156 billion, or 0.9%; this was down from a 7.5% growth during second quarter 2020.

The number of banks across the nation on the FDIC problem list increased from 52 to 56 during the third quarter. Despite the increase, the FDIC said the number of problem banks remains near historical lows.

The Deposit Insurance Fund balance was $116.4 billion on Sept. 30, up $1.8 billion from the end of the second quarter, and the DIF reserve ratio remained at 1.30%. Because the reserve ratio fell below its statutorily required minimum of 1.35% on June 30 of this year, the FDIC board adopted a Fund Restoration Plan in September.

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