While the condition of Iowa banks is generally strong, regulators worry about concentrations in commercial real estate and agricultural loans, in addition to liquidity and cybersecurity issues, representatives from the State of Iowa, the Federal Reserve Bank of Chicago, and the FDIC told bankers gathered in Okoboji on July 20 at the annual meeting of the Community Bankers of Iowa.
“Ag lending is the No. 1 thing that keeps me awake at night,” said James LaPierre, the FDIC interim Regional Director for the Chicago region. LePierre said that 60 percent of the 1,500 banks in the Kansas City region make enough ag loans to be considered agricultural banks.
LaPierre has been Regional Director for the Kansas City region since 2005, but was transferred to the Chicago region July 1 to facilitate a leadership change. LaPierre said he expects to return to the Kansas City region Oct. 1.
Jeff Jensen, assistant vice president/Iowa Regional Director for the Federal Reserve Bank of Chicago, said he is not worried about ag lenders, but about farmers. “We are concerned about farmers not reaching breakeven levels,” he said.
Bankers in the area are lending an average of $3,000 to $4,000 per acre of farm land, a safe ratio with farm land selling for $10,000 per acre and more. Ron Hansen, Superintendent at the Iowa Division of Banking, commented on the cautious nature of many Iowa bankers. “A lot of our CEOs were around in the 1980s as loan officers, so that might affect their thinking about how much they are willing to lend per acre,” he said.
For comparison, Hansen said 39 banks closed in Iowa between 1982 and 1988 when the farm crisis was at its peak. In the 28 years since then, only four banks have been closed. “Our current classified-to-capital ratio for all Iowa banks is 15.43 percent,” he said. “In 2010, it peaked at 52.3 percent. In June 1987, 195 out of 501 Iowa banks had a ratio over 60 percent – 29 banks had a ratio over 150 percent.”
Jensen said his examiners are seeing an increase in CRE loan concentrations. “The concentration level is up over 5 percent from a year ago,” he said. Most of the loans are being made for real estate in metro areas, and he said that community banks “are doing a very solid job of underwriting, tracking and conducting appropriate stress testing.”
Liquidity is LaPierre’s No. 2 concern, he said. Four or five years ago, he explained, borrowers kept large deposit balances and rarely drew down their credit lines. Today, they have used up their deposits and are drawing on their lines of credit. “We are seeing strains on liquidity in some of our institutions,” LaPierre said.
LaPierre said historically banks in the region run a loan to deposits ratio of 60 percent to 70 percent. In the last 25 years, the median for Iowa banks is 63 percent. Last year, the median was 65.5 percent. “That’s not dramatic, but it’s a trend,” LaPierre said. “Our examiners are looking more closely at liquidity and your contingency funding plans.”
Cybersecurity is LaPierre’s No. 3 concern. He said most of the attacks come in the form of phishing, where a scammer sends fake but authentic-looking emails to staff in the bank that releases malware when opened. He said training is essential for mitigating the risk of this kind of attack.
Responding to a question about ransomware, the three regulators said there have been almost no reported cases in the region. LaPierre said the FDIC does not advise paying the ransom. They all said that organizations confronted with a ransomware attack should contact their core processing partner immediately. Typically, the attack can be isolated and data retrieved from backups to proceed uninterrupted.
Hansen shared the following statistics about Iowa banks, based on March 31 information:
- Loans and leases total $57.1 billion, up 6.9 percent from a year earlier;
- Non-current loans equal 0.73 percent of total loans, up from 0.65 percent a year earlier;
- Non-performing assets equal 0.58 percent of total assets, up from 0.54 percent a year earlier;
- Non-current loans and leases as a percentage of total loans and leases are higher at banks with assets of less than $100 million compared to other institutions;
- Average net interest margin was 3.34 percent compared to 3.37 percent one year earlier and 3.38 percent two years earlier;
- Return on assets was 1.26 percent compared to 1.17 percent a year earlier;
- First quarter net income for Iowa banks was $267 million compared to $245 million in 2016; and
- 97 percent of Iowa’s 279 state chartered banks have a composite CAMELS rating of 1 or 2.