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
District bank earnings increased during the quarter, with an aggregated quarterly return on average assets (ROAA) of 1.32 percent (see Chart A6). Earnings improvement was largely due to net interest margin (NIM) expansion (see Chart A4). The District NIM increased to 3.75 percent during the quarter, its highest level since 2019 (see Chart A11). Margins benefited from increasing yields on earning assets, particularly loans, which reversed a previously declining trend. Funding costs remained stable (see Supplemental Chart 1). Despite a small increase in the second quarter, non-interest income remained below the historical average (see Chart A17). However, overhead expense also remained below average, offsetting the effect of reduced noninterest income (see Chart A19). Finally, provision expenses impacted earnings: District banks under $250MM increased provisions (now at a multi-year high) while larger bank provisions returned to average following an uptick in the prior quarter (see Chart B2).
Balance sheets grew modestly during the quarter as banks increased loans, shed liquid assets, and took on more borrowings amid limited deposit growth (see Chart C3). Most notably, loan growth rebounded, totaling more than $6B quarter-over-quarter (see Chart C4). Loan growth increased across all major loan types, with the exception of construction and land development (CLD) lending, which declined slightly (see Chart C11). Conversely, District banks reduced liquid assets, primarily cash and due from balances, resulting in a decreased liquid asset ratio of 14.6 percent (see Chart D9). Investment securities portfolio balances remained stable, and while securities continue to be hindered by large levels of unrealized losses, unrealized positions on available-for-sale securities improved to 12.7 percent of Tier 1 capital (see Chart D11).
Funding profiles were impacted by limited deposit growth and increased borrowings, reversing the trend of previous periods (see Supplemental Chart 2). Core deposits were stable, following significant growth in the prior three quarters. Instead, banks primarily turned to Federal Home Loan Bank (FHLB) borrowings, which increased 17 percent, as well as uninsured time deposits, which increased 3 percent, during the quarter. Capital levels continued an increasing trend, with the District Tier 1 leverage ratio exceeding 10.1 percent (see Chart A2).
Asset quality trends are characterized by increasing noncurrent levels. Noncurrent loans totaled 0.7 percent of total loans, the highest level since 2021 (see Charts B8, B10). District banks under $250MM have the highest noncurrent rates and have experienced the greatest increase in delinquency measures. Across the major loan types, commercial real estate (CRE) delinquencies have increased the most, with noncurrent rates moderately above the 10-year average. Additionally, net charge-offs remained above average despite a modest quarter-over-quarter decline (see Chart B3). Allowance levels were steady at 1.39 percent of total loans as provisions are managed in line with loan growth and charge-off rates (see Chart B5).