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Iowa banks are in good financial shape to weather a short-term recession, says the state’s chief bank regulator, but interest rate cuts will cause already lower earnings to decrease further in the first half of 2008.

“I think for the most part, we’re seeing that the banks are in pretty good condition,” said Tom Gronstal, superintendent of the Iowa Division of Banking. “It just depends on how long and deep an economic downturn we have.”

Iowa banks have largely escaped the steep bad-loan expenses that caused earnings for U.S. banks to tumble by 25 percent from a year ago. By comparison, net income for the state’s commercial banks remained relatively flat at $411 million for the first three quarters of 2007, the most recent data available, compared with $410 million in the first three quarters of 2006. Earnings of Iowa commercial banks are down 4 percent compared with year-to-date 2005 figures, however.

Year-to-date 2007 earnings of Greater Des Moines banks varied from nearly $15 million for West Des Moines-based West Bank, to a net loss of $635,000 for another West Des Moines institution, First Bank. (see chart). Among 29 Iowa-based banks that operate in Greater Des Moines, 45 percent reported increased earnings, while the remainder reported lower quarterly earnings. One of the three banks reporting a net loss, VisionBank, is a start-up; the other two struggled due to loan losses.

First Bank in West Des Moines, for instance, wrote off $1.08 million in loan losses in the third quarter, which led to a $635,000 year-to-date net loss.

“It’s just like banks across the country,” said Rick Messerschmidt, president and CEO of First Bank. “Everybody’s feeling it; it’s a sign of the times. Banks will survive it. We’ve all got to work on restoring confidence in our economy.” Messerschmidt said the bank “did make money” in the fourth quarter, for which results have not yet been reported.

The three largest national banks in the Greater Des Moines market, Bank of America Corp., Wells Fargo & Co. and JPMorgan Chase, each recently reported lower fourth-quarter earnings. Wells Fargo reported a 4 percent decline in annual net income from 2006 earnings, to $8.04 billion. The company reduced its fourth-quarter earnings by $1.4 billion to build up its credit reserves, primarily for home-equity losses.

Nationally, loan-loss provisions have surged to a 20-year high of $16.6 billion, more than double the $7.5 billion that institutions insured by the Federal Deposit Insurance Corp. set aside for credit losses in the third quarter of 2006 and the largest quarterly loss provision for the industry since the second quarter of 1987.

With the Federal Reserve chopping interest rates by 1.25 percentage points over an eight-day period, banks’ profit margins are going to suffer, Gronstal said. “Any of the variable-rate loans based on the prime rate that adjust daily will be adjusted down immediately,” he said. “That’s a significant cut to the margin; there’s no way that banks can reduce their liabilities that quickly. So I would expect that in the first half of the year, bank earnings won’t be as good as last year, but they’ll still be positive.”

Looking over performance ratios for Greater Des Moines banks, Gronstal noted that they are well capitalized, with a risk-based capital ratio of more than 11 percent, “which is pretty strong,” he said. “The earnings, while they aren’t as good as last year, are still in an acceptable range, at almost 1 percent return on assets and at 10 percent on equity.”

The Iowa Division of Banking monitors the state-chartered banks “pretty closely,” Gronstal said, and receives notification from federal regulators if any nationally chartered banks are in difficulty.

“There are no state banks that we believe are in any serious financial condition,” he said. “There are some that are not as good as others, but we don’t see any serious problems.” None of the 335 state-regulated banks is rated below a 3 on a 1 to 5 rating scale, he said, with 1 being the best score, and only about a dozen have a 3 rating, indicating improvements are needed.

For the most part, Iowa banks did not purchase the types of securitized “private label” mortgage-backed securities that have led to the current turmoil in the financial markets, Gronstal said.

“There is a very small amount of those securities held by Iowa banks,” he said. “Most Iowa banks buy either bonds issued by the Federal Home Loan Bank, the Federal Home Loan Mortgage Corp. or the Federal National Mortgage Association. There’s not much of an issue with those bonds.”

However, the amount of past-due loans has surged both nationally and in Iowa. Overall, FDIC-insured institutions reported a $16 billion increase in noncurrent loans and leases during the third quarter. That 24 percent rise was the largest single-quarter increase in 20 years, with more than half of the increase consisting of residential real estate loans.

Among Greater Des Moines banks, the dollar amount of loans 30 to 90 days past due is up 58 percent compared with a year ago.

Most banks have sufficient cushion to absorb reduced earnings for at least a couple of quarters without getting into significant financial difficulty, Gronstal said. How well they fare after that “depends on the individual bank.”

“There are a lot of banks that can go several years without making any money without getting into any difficulty,” he said. “There are other banks that have more demands on their earnings that will start to feel the pinch in a year or less. But usually the banks, over the course of six to nine months, can make adjustments on their liability side to get their margins back in shape. The other thing this means is that savers won’t get paid as well on their deposits; we’ll go back to pretty low returns on CDs and savings accounts.”