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
Tenth District (District) bank earnings performance continues an improving trend. As of June 30, 2026, year-to-date return on average assets (ROAA) across District banks increased to 1.42 percent, its highest level since 2021 (see Chart A6). Earnings improvement has been primarily driven by net interest margin (NIM) expansion, in addition to modest increases in noninterest income (see Chart A4). The NIM benefitted from a rebound in earning asset yields during the second quarter, while funding costs increased only modestly (see Charts A13 and A15). Noninterest income also increased, attributable to other non-specified fee income types (see Chart A17). Overhead expenses as a percent of average assets continued to rise, particularly in other noninterest expense areas, hindering further earnings improvement (see Chart A19).
Credit quality conditions continue to deteriorate modestly. Noncurrent loans across District banks increased to 0.74 percent of total loans, which approximates the 10-year average. Across loan segments, commercial real estate (CRE) and consumer noncurrent rates are above their 10-year averages, and commercial and industrial (C&I) and 1-4 family noncurrent rates are increasing (see Charts B8 and B10). District banks under $250 million have seen the greatest increase in noncurrent loans, now representing 1.10 percent of total loans, its highest level since 2020. District banks have maintained stable allowance levels at 1.39 percent of total loans with steady provisioning, moderate charge-off activity, and continued loan growth (see Charts B3 and B5).
Balance sheet growth was minimal during the second quarter, as District banks used liquid assets to fund loan growth (see Chart C3). Loans grew 1.7 percent quarter-over-quarter, with the greatest increase in CRE, C&I, and agriculture loans (see Charts C14 and C16). Banks reduced cash items, which declined 8.4 percent during the quarter (see Chart C3). As a result, the liquid asset ratio declined to 14.3 percent, reversing a previously improving trend (see Chart D9). Core deposit growth slowed considerably, increasing only 3 basis points during the quarter, following more robust growth in the prior two quarters. Brokered deposits and Federal Home Loan Bank (FHLB) borrowings declined modestly, though wholesale funding utilization remains elevated largely due to growth in reciprocal deposits (see Charts D12 and D14, and Supplemental Chart).
Capital levels remain strong. The District Tier 1 Leverage ratio increased to 10.5 percent, benefiting from high earnings and muted asset growth during the quarter (see Chart A2). Despite regulatory capital strength, unrealized losses on available-for-sale securities as a percent of Tier 1 capital remain elevated, totaling 8.4 percent (see Chart D11).
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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