Iowa banks' profits remain strong

By KAREN MRACEK • kmracek@dmreg.com • November 26, 2008

Iowa's commercial banks fared better than the nation in the third quarter, thanks in part to more conservative lending standards.

The state's banks earned $399 million in the third quarter of 2008, down 3 percent from the year before, according to data released by Federal Deposit Insurance Corp. on Tuesday. The national aggregate earnings fell more than 57 percent in the same period.

"Iowa still looks very good compared to the nation," said John Sorensen, president and chief executive of the Iowa Bankers Association.

More than 94 percent of the banks are profitable, the report said, compared with just more than 80 percent of the nation's banks still making money.

"Iowa paints a very different picture than the rest of the nation," Sorensen said. "I think the level of profitability in Iowa is exceptional."

Iowa banks continued to loan money in the third quarter, the FDIC numbers show. Total loans and leases equaled $38.7 billion for the period, up 6.06 percent a year ago and up 2.17 percent from the previous quarter.

"There's two sides to lending, the lender and the buyer, and both are considerably more averse to the lending transaction right now," Iowa Superintendent of Banking Tom Gronstal said last week. "But at least in Iowa, credit is available from banks."

Also rising, however, was the amount of real estate owned by Iowa banks, because of foreclosures on residential and commercial properties.

Banks in Iowa own $168 million in real estate, compared with $55 million in 2007.

"Our members don't lend money so they can end up owning property," Sorensen said.

The amount of noncurrent loans almost doubled in the third quarter from the year before, up to 1.59 percent of Iowa banks' total loans and leases. That compares with 0.98 percent in the same period a year ago. Those bad loans are still lower than the national average of 2.23 percent.

"Iowa banks have a different funding model" from some of the larger national financial services companies, Sorensen said. Iowa commercial banks rely on core deposits for their lending, compared with finding capital to lend from the stock market, he said.

Capital levels and reliance on retail deposits remain higher at smaller community banks than the industry average. In Iowa, banks with assets of less than $100 million had a capital-to-asset ratio of 11.36 percent, higher than 9.22 percent for banks with more than $100 million in assets.

"Community banks are traditionally a steady source of credit for Main Street America," FDIC Chairman Sheila Bair said in a statement. "So it's essential that these banks have full opportunity to participate in Treasury's capital purchase program."

Approximately 30 to 40 Iowa banks applied to the Treasury's capital purchase program before Nov. 14, the original deadline to participate, Gronstal said. The Treasury will not release names of banks until the department approves the funding.

The Treasury extended the deadline to Dec. 8 for privately held banks, giving banks such as Des Moines-based Bankers Trust a bit longer to decide.

"We don't know enough about it," Bankers Trust chief executive Suku Radia said.

A few provisions in the terms of the program are giving the banks reason to pause, he said. Among these: limits on the ability to pay dividends, repurchasing other shares and trading shares within the organization.

"Do I want the government to decide what we pay for a dividend?" Radia said. "We are going to take a good, hard look at it."

MetaBank's parent company, Meta Financial Group, is another bank reviewing whether to participate in the Treasury program, said Lisa Binder, vice president of investor relations and corporate communications.

About half the banks in Iowa — those structured as S-corp, a tax-code classification — are waiting to see if they will be able to participate and what terms the Treasury will offer for buying a stake in these firms. "But certainly, there is an awful lot of pressure on the Treasury to get this money out there," Gronstal said.