Second Quarter FDIC Report Reflects Banking Industry’s Commitment to Iowa Communities
This article was reprinted from the Iowa Bankers Association
Although economic stress related to the COVID-19 pandemic continued to affect bank earnings, the industry remained a source of strength for the economy, according to second quarter results released in late August by the Federal Deposit Insurance Corp.
“Iowa banks continue to demonstrate resilience and agility during these uncertain economic times, all in an effort to ensure they can provide valuable financial services to their communities,” said John Sorensen, president and CEO of the Iowa Bankers Association. “We delivered nearly 60,000 Paycheck Protection Program loans to Iowa small businesses, hospitals and farms — helping to preserve more than 750,000 jobs. The Iowa banking industry is committed to maintaining the financial strength needed to help Iowans create a brighter post-pandemic future.”
Iowa-chartered banks continued to support the state’s economic development with $69.4 billion in active loans on their books as of June 30, 2020, up 9.8% from the prior year. Despite the pandemic-induced economic challenges, Iowa bank credit quality remained strong. In the second quarter, net loan charge-offs were down slightly to 0.08%, compared to 0.09% last quarter. At 0.86%, the noncurrent loan percentage of total loans is up from the second quarter 2019 percentage of 0.75%.
In addition to providing access to quality credit, Iowa consumers continued to turn to Iowa banks to safeguard their money. Total deposits at Iowa banks were $82.7 billion at the end of second quarter this year, up 13.4% from the year prior when deposits totaled $72.9 billion.
Second quarter year-to-date net income for the Iowa banking industry was $559 million on June 30, 2020 — down from $571 million, or 2.1%, from the previous year’s second quarter — and total assets were $100.5 billion. Return on assets (ROA), another indicator of overall bank performance, declined to 1.18%, compared to 1.31% at the end of second quarter 2019.
FDIC Chairman Jelena McWilliams said that nationally “banks of all sizes supported their customers and communities, including by originating more than $480 billion in U.S. Small Business Administration Paycheck Protection Program loans in the second quarter.”
Nationally, lower levels of business activity and consumer spending — combined with uncertainty about the path of the economy and the low interest-rate environment — contributed to higher provisions for loan and lease losses, as well as a decrease in net interest margins, the FDIC reported.
“As individuals and businesses sought safety during the uncertain economic environment, banks experienced their second consecutive quarter of over $1 trillion in new deposits, increases that far exceed any deposit growth the FDIC has seen in the past,” McWilliams said. “These inflows demonstrate public confidence in the banking system, as well as the system’s ability to accommodate unprecedented customer demand.”
However, this rapid growth has been so substantial that despite a $1.4 billion increase in the FDIC Deposit Insurance Fund — resulting in a record balance of $114. 7 billion — the DIF ratio fell from 1.39% in first quarter to 1.30%, which is below the required minimum of 1.35%. McWilliams emphasized Tuesday that the fund — which is supported by bank premiums — has more money than at any time in the FDIC’s history, and the reduction in the reserve ratios was solely a result of the unprecedented increase in bank deposits. FDIC officials anticipate that deposit growth will normalize in the upcoming quarters without any need to modify assessment rates in the near-term.
Net operating revenue nationally remained relatively stable from one year ago at $202 billion. As mentioned, banks’ net income declined for a third consecutive quarter, falling 5.4% from a year ago. This reduction was partially offset by an increase in noninterest income due to higher trading income during the quarter, the report stated.
The second quarter report showed that loan growth rose nationally by 6.7% from a year ago. The quarterly results were mixed among major loan categories. The commercial and industrial loan portfolio reported the largest quarterly dollar increase of $146.5 billion. The implementation of the PPP in the second quarter drove this growth, with $482 billion in PPP loans on banks’ balance sheets ending June 30, 2020. Consumer loans, on the other hand, declined by $67.1 billion during the quarter, driven by lower consumer spending and a decline in credit card loan balances.
Nationally, community banks continued to report challenges in agriculture loan portfolios during second quarter 2020, with noncurrent rates increasing in both farmland and agricultural production loan categories, the FDIC reported Tuesday. The community bank farmland loan noncurrent rate rose 31 basis points year over year to 1.84%, and the agricultural production loan noncurrent rate rose 28 basis points to 1.22%. However, the FDIC reported that the net charge-off rate for agriculture loans, as well as all other portfolios, remained low during the quarter.
The FDIC attributed banks’ continuing deposit growth to several factors, including fiscal and monetary policy and economic uncertainty. Deposits increased by $1.2 trillion from the first quarter, and 21% from a year ago. It’s the highest growth rate ever reported in the FDIC’s Quarterly Banking Profile. “With rising deposits, the banking industry’s liquidity strengthened. Cash and due from balances rose by $1.3 trillion from the second quarter of 2019 and now account for nearly 14% of total assets, up from 9% of total assets last year,” the FDIC report stated.
The number of banks across the nation on the FDIC problem list declined from 54 to 52 during the second quarter and remains near historic lows. Changes to the number of insured institutions during the second quarter include one new bank that opened, 47 banks absorbed by mergers and one bank that failed, the FDIC reported.