Banking conditions in the Federal Reserve Bank of Kansas City region reflected broader industry stress during the first quarter of this year, according to a recent report.
Loan growth slowed in the first quarter, growing at a 1.6 percent rate, according to the Fed. All major loan types beside agricultural loans experienced growth, with construction and land development experiencing the largest increase at 3.7 percent.
Pricing pressures caused bank margins to compress. Funding costs increased by 43 basis points, with yields on earning assets only increasing 26 basis points during the same period. The Fed attributed higher interest rates and the collapses of Silicon Valley Bank, Signature Bank and First Republic Bank in increasing balance sheets and earning trends.
“Earnings performance remained stable at district banks as compressed margins were partially offset by reductions in total expenses,” the Fed stated. “Return on average assets totaled 1.24 percent as of the first quarter at district banks, compared to 1.22 percent at year-end 2022.”
District banks increased their cash reserves 23.6 percent, according to the report, the largest quarterly rise since the start of the pandemic. “On the liability side, district banks continued to see deposit runoff, with 52 percent of banks experiencing declines in their core deposits in the first quarter,” the Fed stated.
Other report findings included:
- Low levels of noncurrent loans continued across major loan types, even as the number of loans 30-89 days past due saw a slight increase. The allowance for credit losses as a percentage of loans increased to 1.42 percent from 1.28 percent at year-end 2022.
- Capital ratios improved, with leverage ratios increasing to 9.73 percent from 9.66 percent at the end of 2022. Assets remained stable and Tier 1 capital grew. The risk-based capital ratio increased to 13.6 percent from 13.3 percent.
- The liquid asset ratio fell to 15.7 percent from 17.8 percent as liquid assets were restricted by large amounts of unrealized losses in securities portfolios. “While unrealized positions have improved over the past couple of quarters, unrealized losses remain sizable,” the Fed stated.