Commercial banks in Tenth District states continued to perform well in the first half of 1994. Profitability leveled off at a high level, asset quality improved, and loan growth accelerated. Based on these performance measures, banks in district states once again outperformed banks in the rest of the nation.Bank profits ; Federal Reserve District, 10th

Corey M. Koenig

William R. Keeton

English

Research Papers in Economics

Continued Strength at Tenth
District Banks
By William R. Keeton and Corey M. Koenig
C
ommercial banks in Tenth District states contin-
ued to perform well in the first half of 1994.
Profitability leveled off at a high level, asset quality
improved, and loan growth accelerated. Based on
these performance measures, banks in district states
once again outperformed banks in the rest of the nation.
Performance of district banks
Profits at district banks were virtually un-
changed in the first half of 1994 following three
consecutive years of increases (Chart 1). Profits are
measured by return on assets (ROA), the ratio of
after-tax profits to average assets. ROA at district
banks fell 3 basis points from the first half of 1993 to
1.25 percent. District banks continued to outperform
banks in the rest of the nation by a small margin, as
ROA in the United States edged down to 1.17 percent.
Profits remained high because decreases in net
interest income and extraordinary gains were offset
by declines in net noninterest expense and loan loss
provisions (Table 1). The ratio of net interest income
to assets declined 7 basis points. Banks’ cost of funds
fell in lagged response to earlier decreases in market
rates. But returns on loans and securities fell even
more, reducing net interest income. Extraordinary
gains fell 6 basis points due to a change in regulatory
accounting rules that boosted earnings in 1993 but
not in 1994. Helping to offset these changes was an
8 basis-point decline in net noninterest expense. And,
loan loss provisions fell 8 basis points to only 0.14
percent of assets, as banks’ substantial loan loss re-
serves and strong asset quality reduced the need to
set aside funds for loan losses.
 Asset quality continued to improve at district
banks. Asset quality can be measured by the sum of
other real estate owned and noncurrent loans. Other
real estate owned consists mainly of foreclosed prop-
erty, while noncurrent loans are loans at least 90 days
overdue and not accruing interest. At the end of June,
these problem assets were 0.92 percent of total assets,
down from 1.34 percent a year earlier and well below
the national average of 1.27 percent.
Loan growth also accelerated in the first half of
1994. Loans grew at an annual rate of 11.6 percent in
the first half of 1994, almost twice the national aver-
age and up from 7.3 percent in the first half of 1993.
The increase in loan growth appears even greater
when adjusted for the absorption of savings institu-
tions. Such absorption accounted for much of the
growth in district bank loans in the first half of 1993
but very little of the growth in the first half of 1994.
Performance by state
Changes in banking performance varied across
district states. Profits increased in Missouri, were stable
in Colorado, Wyoming, and Nebraska, and declined
in Kansas, New Mexico and Oklahoma (Chart 2).
Asset quality improved in all states, but especially in
New Mexico (Table 1). Loan growth was moderate
to strong in all states and faster than a year ago in
every state except Colorado and Nebraska.
Missouri. Profits increased moderately at Mis-
souri banks. ROA rose 14 basis points to 1.24 percent.
An 18 basis-point decline in loan loss provisions
accounted for most of the gain.
 Asset quality improved and loan growth accel-
erated. Problem assets fell from 1.63 percent of total
assets in June 1993 to 1.15 percent in June 1994, as
banks continued to work off their noncurrent loans
and foreclosed property. Loans grew at an annual rate
of 9.9 percent in the first half of 1994, up from 3.6
percent a year earlier.
7Colorado. Banks in Colorado earned almost the
same profits as in 1993. ROA fell one basis point to
1.30 percent. Net interest income fell almost 20 basis
points. Net noninterest expense fell even more, how-
ever, helping sustain profits. 
Asset quality improved significantly, while
loan growth moderated but remained very strong.
The ratio of problem assets fell by half to 0.45 per-
cent, the lowest rate in the district. Loans grew a
strong 18.0 percent. This pace was down from the
first half of 1993, but only because the absorption of
a large savings institution inflated loan growth in the
earlier period.
Wyoming. Profitability was virtually unchanged
at Wyoming banks. ROA slipped a couple of basis
points to 1.35 percent, leaving Wyoming with the
second-highest profit rate in the district. Net interest
income fell almost 30 basis points. The impact on
profits, however, was offset by a moderate drop in
loan loss provisions and a sharp decline in net nonin-
terest expense. 
Asset quality improved and loans continued to
grow rapidly. Problem assets fell from 0.79 percent
of assets to 0.46 percent, one of the lowest ratios in
the district. Loans grew a strong 21.5 percent, up
from 17.9 percent in the first half of 1993.
Nebraska. Bank profits fell slightly in Ne-
braska, as ROA slipped 3 basis points. Even with the
decline, however, Nebraska banks earned an ROA of
1.52 percent, the highest profit rate in the district. The
major components of profits changed by only small
amounts and in largely offsetting directions. 
Asset quality improved slightly and loans con-
tinued to grow at healthy pace. Problem assets edged
down to 0.53 percent of total assets, well below the
district average. Loans increased at a 6.2 percent rate,
about the same as in the first half of 1993.
Kansas. Profits declined modestly at Kansas
banks. ROA fell 8 basis points to 1.08 percent, the
lowest rate in the district but still healthy. The decline
in profits resulted from a 10 basis-point decline in net
interest income and a 9 basis-point decline in extraor-
dinary gains. Loan loss provisions also fell 11 basis
points, limiting the drop in earnings.
Asset quality improved and loan growth picked
up. Problem assets fell about 30 basis points to 1.25
percent of total assets, due mainly to a decrease in
foreclosed property. Loans grew 5.2 percent in the first
.6
Return on Assets
Tenth District States and U.S.
Percent
1.4
Chart 1
1.0
First half
1990
.8
1.2
.4
First half
1991
First half
1992
First half
1993
First half
1994
Tenth District commercial banks
U.S. commercial banks
8half of 1994 after declining modestly a year earlier.
New Mexico. Banks in New Mexico experi-
enced a moderate decline in profitability, as ROA fell
15 basis points to 1.12 percent. The decline in ROA
was due to a decrease in net interest income and
increase in loan loss provisions. Net noninterest ex-
pense also fell, but not enough to sustain profits.
While New Mexico was the only state in which loan
loss provisions increased, provisions remained low
at 0.26 percent of assets. 
Asset quality improved sharply and loans grew
faster than in any other district state. The ratio of
problem assets fell 80 basis points to 1.03 percent,
reflecting steep declines in both noncurrent loans and
foreclosed property. Loans increased at a 29.2 per-
cent rate after declining slightly a year earlier. Much
of the rapid loan growth this year was due to the
transfer of a credit card bank from outside the state.
Even without the new bank, however, loans would
have grown a strong 12 percent. 
Oklahoma. Banks in Oklahoma recorded the
largest decline in profits among district states. ROA
fell 34 basis points to 1.18 percent. Most of the
decline was due to a sharp drop in extraordinary
gains, reflecting a change in regulatory accounting
rules that temporarily boosted profits in 1993. Net
gains from security sales also fell, contributing to the
decline in profits.
Asset quality continued to improve and loan
growth accelerated. A substantial decline in fore-
closed property helped reduce problem assets to 0.96
percent of total assets. Loan growth doubled to 11.9
percent, just above the average for the district. 
Conclusion
Banks in Tenth District states continued to per-
form well in the first half of 1994. After three straight
years of increases, profitability stabilized at a high
level. Asset quality continued to improve and loan
growth accelerated. District banks outperformed
banks nationwide by all three measures, but espe-
cially asset quality and loan growth. 
.8
Return on Assets by State
Commercial Banks
Percent
1.6
Chart 2
1.2
District
1.0
1.4
.6
MO CO WY NE KS NM OK
First half
1993
First half
1994
William R. Keeton is a senior economist at the Federal Reserve Bank of
Kansas City.  Corey M. Koenig is a research associate at the bank.
9Table 1
Bank Performance Measures
Tenth District States
Tenth
District States Colorado Kansas Missouri
1993 1994 1993 1994 1993 1994 1993 1994
Profits (ROA) 1.28 1.25 1.31 1.30 1.16 1.08 1.10 1.24
Net interest income 4.21 4.14 4.65 4.47 4.08 3.98 3.84 3.83
– Loan loss provisions .22 .14 .10 .08 .25 .14 .31 .13
– Net noninterest expense 2.15 2.07 2.71 2.42 2.18 2.15 1.81 1.76
+ Net securities gains .04 .01 .05 .03 .04 .03 .03 .02
+ Extraordinary gains .06 .00 .04 .00 .09 .00 .00 .00
– Total taxes .66 .70 .63 .70 .62 .66 .64 .72
Net chargeoffs .18 .10 .08 .08 .15 .12 .26 .06
Loan loss reserve ratio 137 169 275 354 139 147 98 134
Problem assets 1.34 .92 .90 .45 1.57 1.25 1.63 1.15
Loan growth 7.3 11.6 31.9 18.0 -1.6 5.2 3.6 9.9
Nebraska New Mexico Oklahoma Wyoming
1993 1994 1993 1994 1993 1994 1993 1994
Profits (ROA) 1.55 1.52 1.27 1.12 1.52 1.18 1.37 1.35 
Net interest income 4.70 4.72 4.49 4.36 4.14 4.06 4.54 4.27
– Loan loss provisions .36 .30 .16 .26 .08 .07 .17 .08
– Net noninterest expense 2.02 2.08 2.42 2.33 2.22 2.19 2.32 2.13
+ Net securities gains .04 .01 .01 .00 .08 -.03 .05 -.02
+ Extraordinary gains .02 .00 .03 .00 .25 .00 -.01 .01
– Total taxes .83 .84 .68 .65 .64 .60 .72 .69
Net chargeoffs .28 .26 .14 .05 .10 .08 .09 .04
Loan loss reserve ratio 193 228 130 187 132 136 152 224
Problem assets .66 .53 1.83 1.03 1.33 .96 .79 .46
Loan growth 6.5 6.2 -.5 29.2 5.9 11.9 17.9 21.5
Note: Data are for the first six months of the year. ROA may not equal the sum of the components due to roundoff error. ROA,
components of ROA, and net chargeoffs are a percent of average assets. The loan loss reserve ratio is loan loss reserves as a per-
cent of noncurrent loans at midyear. Problem assets are noncurrent assets plus other real estate owned, excluding direct and indi-
rect investments, as a percent of total assets. Loan growth rates are annualized percent changes from December 31 of the prior
year to June 30.
Source: “The Consolidated Reports of Condition and Income” for all FDIC insured commercial banks in the seven states of the
Tenth Federal Reserve District.
10

Continued strength at Tenth District banks

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Continued strength at Tenth District banks

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