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 banks increased year-over-year, with an aggregate return on average assets (ROAA) of 1.30 percent, the highest level since 2021 (see Chart A6). Improvement was primarily driven by expansion of the net interest margin (NIM), which increased to 3.89 percent for the quarter (see Chart A11). Throughout the year, margins primarily benefited from declining interest expense (see Chart A15), while interest income remains elevated (see Chart A13). Margins are well above the 10-year average, though expansion slowed in the fourth quarter.
Earnings improvement was partially offset by increased overhead expenses and higher provision levels (see Chart A4). Noninterest expense as a percent of average assets increased to 2.65 percent for the year, the highest level since 2020, primarily due to growth in other overhead categories (see Chart A19). Small District banks under $250 million have experienced the greatest increase in overhead costs in recent years. Additionally, banks have modestly increased provision expenses in response to trends in asset quality and loan growth (see Chart B2), which hindered further earnings improvement.
Asset quality has shown some signs of deterioration. While conditions remained relatively stable quarter-over-quarter, problem assets increased 12 percent year-over-year, driven primarily by growth in nonaccrual loans (see Chart B7). Commercial real estate (CRE) and consumer noncurrent rates exceed 10-year averages, while commercial and industrial (C&I) noncurrent loans are elevated specifically in District banks under $1 billion (see Charts B8 and B10). Small banks under $250 million have the highest noncurrent rates, particularly across construction and land development (CLD) and C&I loans, with almost 2 percent of loans in these categories now reported as noncurrent (see Supplemental Chart). Similarly, charge-offs remain elevated and are above the 10-year average (see Chart B3).
Balance sheet composition shifted modestly during the quarter. Cash and due from balances increased, while securities balances remained stable (see Chart C3). Loan portfolios expanded across the District, with year-over-year loan growth of 5.5 percent (see Chart C14). Small banks under $250 million experienced the highest loan growth rates, driven by 1-4 family, agriculture, and CRE loans (see Chart C14 and C16). Funding profiles benefited from increasing deposit levels, with strong core deposit growth of 2.4 percent in the fourth quarter (see Chart C3). At the same time, wholesale funding remains above the 10-year average, totaling 14.9 percent of assets (see Chart D14). Capital ratios are also above the 10-year average despite a small decline in the District Tier 1 Leverage ratio quarter-over-quarter to 10.2 percent (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.