District Banking Conditions publications are produced quarterly and provide a comprehensive view of financial performance data across Tenth District commercial banks compared to national trends.
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Executive Summary
Earnings across Tenth District (District) banks are elevated. Return on average assets (ROAA) increased to 1.37 percent in the first quarter, the highest level since third quarter 2021 (see Chart A6). Net income improvement is largely driven by increases in the net interest margin (NIM), now at 3.89 percent, though expansion slowed during the quarter (see Chart A11). Interest expense declined to 1.70 percent of average assets but remains elevated (see Chart A15). Interest income as a percent of average assets also declined, driven by declining loan yields (see Chart A13). In addition, earnings have benefited from moderated provision expenses, which declined from prior periods (see Chart B2), but continue to be impacted by below-average noninterest income (see Chart A17) and a modestly increasing trend in overhead expense (see Chart A19).
District credit quality metrics show modest deterioration, with a continued slow uptick in problem assets (see Chart B7). Nonaccruals and loans 90 or more days past due now total 0.74 percent of total loans, which approximates the 10-year average, though is higher in banks under $250 million. Additionally, loans 30-89 days past due increased moderately during the quarter, particularly in banks under $1 billion (see Supplemental Chart 1). Across the major loan types, commercial real estate (CRE) noncurrent loans have experienced the greatest increase over the last year, with noncurrent rates above the 10-year average (see Chart B8). In addition, agricultural noncurrent loans increased moderately in the first quarter but overall remain low (see Chart B10). Despite these indicators, charge-offs moderated during the quarter, following elevated losses in previous periods (see Chart B3). Allowance for credit loss levels are stable at 1.39 percent of loans, impacted by lower loan growth, charge-offs, and provisioning (see Chart B5).
During the first quarter, District banks showed modest but divergent growth patterns across asset sizes. Banks under $1 billion significantly increased liquid assets, particularly cash items, while loan growth stalled following several strong quarters (see Supplemental Chart 2). As a result, the liquid asset ratio increased to its highest level since early 2023, though remains below the 10-year average (see Chart D9). The reduced loan growth in smaller banks was impacted by declines in agriculture and consumer loans but benefited from modest increases in CRE loans. In contrast, District banks over $1 billion saw greater loan growth during the quarter, funded by declining investment securities (see Supplemental Chart 2). Larger bank loan growth during the quarter was driven by commercial and industrial (C&I) lending, while agriculture and residential lending fell.
Similarly, funding strategies are mixed across District banks. Banks under $1 billion saw greater deposit growth and reduced wholesale funding, including borrowings and brokered deposits (see Supplemental Chart 2). In contrast, banks over $1 billion saw minimal deposit growth and instead took on more borrowings (see Supplemental Chart 2). Across all bank sizes, capital levels remain elevated, with an aggregate District Tier 1 Leverage ratio of 10.2 percent, which remains well above the 10-year average despite a small quarter-over-quarter decline (see Chart A2).
The views expressed are those of the authors and do not necessarily reflect the positions of the Federal Reserve Bank of Kansas City or the Federal Reserve System.
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