The Federal Deposit Insurance Corp. data released Thursday shows that banks have adjusted to a challenging interest rate environment and continue to show resiliency in serving their communities. Iowa banks experienced both loan and deposit growth to end the year and expect continued strength in 2024.
“Demand for credit traditionally mirrors economic activity in our state. So, it’s not surprising that a year-over-year 6% increase in Iowa bank lending would correspond with a similar increase in our gross state product,” said John Sorensen, president and CEO of the Iowa Bankers Association. “This positive loan growth occurred despite continuing bank funding and regulatory pressures and borrower apprehension due to economic and geopolitical risks.”
Iowa Banking Results
Iowa banks ended the year with average loan growth of 6% from the previous year and a 1.2% increase from the previous quarter. At the same time, banks experienced modest deposit growth of 0.3% from the third quarter. Two hundred forty Iowa-domiciled banks provided nearly $84 billion in loans to support the economy, up from $79 billion in 2022. The quality of these loans is exceptional with average net loan charge-offs at just 0.05%, a slight increase from the third quarter. The non-current percentage of total loans was 0.48%, up slightly from 0.36% in 2022. This is an indication of the financial health of Iowa borrowers.
Total assets for Iowa banks exceeded $123 billion at year end, an increase of 2% from the prior year. Iowa banks saw a slight decrease in deposits year-over-year to $101.9 billion, but that number was up slightly from the third quarter. The combination of aggressive Federal Reserve tightening and spending down of pandemic-era deposits has left financial institutions with liquidity challenges in meeting new loan demand. The average loan-to-deposit ratio at Iowa banks is 82%.
Iowa banks ended the year with $1.2 billion in net income, a 15.7% decrease from the prior year. The decline is due in large part to lower net interest margins and additions to bank loan loss reserves due to forecasts of slower economic growth in 2024. The average return on assets (ROA) at Iowa banks fell to 0.98% in Q4 from 1.19% the year prior.
National Banking Results
FDIC Chairman Martin Gruenberg reported, “The banking industry has shown resilience after a period of liquidity stress in early 2023. Full-year net income remained high, overall asset quality metrics were favorable, and the industry’s liquidity was stable. Ongoing economic and geopolitical uncertainty, continuing inflationary pressures, volatility in market interest rates, and emerging risks in some bank commercial real estate portfolios pose significant downside risks to the banking industry, These issues, together with funding and earnings pressures, will remain matters of ongoing supervisory attention by the FDIC.”
Total deposits increased by 1.4% from Q3 to $18.8 trillion in the fourth quarter but were still lower than a year ago when deposits totaled $19.2 trillion. Domestic deposits increased for the first time in seven quarters, led by growth in time deposits.
The industry continues to see loan growth, with total loans of nearly $12.5 trillion at quarter end, an increase of 0.9% from the previous quarter. Much of the national loan growth can be attributed to credit card loans — up 2.5% from the previous quarter — and one-to-four family residential mortgages, which increased by 0.9% from the third quarter. Community banks reported a 1.8% increase in loan balances from the previous quarter and a 7.9% increase from the prior year. The loan growth reported by community banks was broad-based with increases reported across all major loan categories. Growth was strongest, however, in residential mortgage loan balances and nonfarm, nonresidential commercial real estate.
Asset quality metrics were favorable overall, but the industry did see deterioration in commercial real estate loans and credit card portfolios. Total assets increased by $259.9 billion (1.1%) from the third quarter, and nearly three-quarters of all banks reported quarterly asset growth. Higher cash balances
and securities holdings led the increase, while lower levels of trading assets partially offset the growth.
The industry’s net income in Q4 was $38.4 billion, down 43.9% from the previous quarter. The decline in net income was driven by higher noninterest expense, lower noninterest income and higher provision expense. The FDIC estimates that “70% of the decrease in net income was caused by specific, nonrecurring, noninterest expenses at large banks.” The FDIC reported that net income for the full year was $256.9 billion, a decrease of 2.3% from the prior year. Despite this decrease, net income for 2023 was still well above the pre-pandemic average.
Community banks reported net income of $5.9 billion in the fourth quarter, a 9.9% decrease from the previous quarter. Higher noninterest and provision expense drove the decline in earnings, according to the FDIC. Net operating revenue increased modestly from the prior quarter on higher net interest income, and the community bank pretax return on assets declined 14 basis points from one quarter ago to 1.07%.
The number of banks on the FDIC’s “problem bank list” increased by eight to 52 banks, and total assets held by problem banks were $66.3 billion, up $12.8 billion from the third quarter. The FDIC reported only one bank failure during the quarter.”
The Deposit Insurance Fund balance increased to $121.8 billion on Dec. 31, an increase of $2.4 billion from the end of the third quarter. The DIF reserve ratio — the fund balance relative to insured deposits — increased by 2 basis points to 1.15%. The FDIC noted that based on projections, “the reserve ratio remains on track to reach 1.35% by the statutory deadline.”