Banking in the Ninth

District Banking Conditions

Conditions Corner - July 2018
Banking & Policy Studies

Published July 31, 2018  | July 2018 issue

Loan growth at commercial banks, both in the Ninth District and in the rest of the nation, has steadily rebounded from the post-financial crisis lows to levels that are closer to their historical ranges. Recent loan growth has been slower at Ninth District banks, but much of the divergence between the District and the rest of the nation is due to the composition of the underlying economy. Local banks have greater exposure to agricultural lending—a slower-growth sector—and less exposure to commercial real estate lending—the fastest-growing sector.

Earnings at Ninth District banks, as noted in the April 2018 Banking in the Ninth, have continued to remain below precrisis levels. One important contributor to the reduced profitability has been interest income from loans, which has been strongly influenced by the low-interest rate environment of recent years. Other key components of loan income are the size of a bank’s loan portfolio and the challenges banks face in their efforts to increase their portfolios over time. In this article, we review recent trends in loan growth at Ninth District banks and describe key differences between the loan composition of local banks and banks in the nation as a whole.

Loan growth over the past 30 years

Chart 1 shows loan growth, measured as the year-over-year change in total loans, at the median bank in the Ninth District (blue line) and the median bank in the nation (red line) since 1990. The most striking feature of the chart is the sharp decline in lending that occurred in the aftermath of the financial crisis. Growth for the typical bank—both in the nation and in the District—for much of the period from 2010 to 2012 was negative. This slowdown also coincided with the peak level of bank failures (157 in 2010 and 92 in 2011).

Since then, loan growth has rebounded steadily, and recent performance for the median national bank has returned to the lower end of its historical range. Loans have been growing at 6 percent annually over the past year and a half, approximately 200 basis points below the precrisis average growth rate of 8 percent. Loan growth at Ninth District banks has been similar to the performance achieved by banks throughout the country during this period. However, there have been periods (such as in the late 1990s and during the financial crisis) when loan growth was considerably slower at District banks. The current environment is also such a period, and growth at the median Ninth District bank has now trailed the median national bank for the past 11 quarters. Indeed, the divergence—which had been narrowing during 2017—grew wider in the first quarter of 2018 when loan growth in the District declined slightly to 4.3 percent while holding steady for the nation at 6 percent. Moreover, the slower growth relative to the nation has been broad based. Five of the six states in the District experienced slower loan growth than the nation over this period. In Montana, the one exception, loan growth fell from 10 percent at the start of 2016 to 4.9 percent in the first quarter of 2018.

Loan Growth at the Median Bank

Reasons for slower loan growth in the Ninth District

An important factor associated with the demand for credit and the growth of loan portfolios at banks is the strength of the underlying economy. Robust economic growth that results in higher levels of household income and business profits typically leads to greater demand for credit to finance higher levels of spending and investment. Conversely, slower economic growth would be associated with reduced loan demand as consumers and businesses postpone larger expenditures. Importantly, economic activity as measured by the change in real GDP has been noticeably lower at Ninth District states over the past two years relative to the United States (Table 1).

Table 1. Change in Real GDP Average from 2016–2017
2.1 2.2 1.7 0.9 -0.6 0.3 2.2
Source: Bureau of Economic Analysis


Economic growth for the entire United States, measured by the change in real GDP, was 2.1 percent per year during 2016-17. Only two states in the District were close to that (Michigan and Wisconsin), and the majority of those states’ economic output tends to occur in areas that are not part of the Ninth District. Growth in the “core” District states was considerably lower in this period, which helps to explain the divergence between loan growth nationally and in the District.

Average Loan Portfolio Composition

The composition of the local economies in the Ninth District also contributes to the weaker loan growth. Large fractions of the economies in District states are directly connected to agriculture and related industries, reflecting the fact that the District is disproportionately more rural and less urban than other sections of the country. As a result, banks in the region also tend to have a disproportionately larger share of their portfolio in agriculture-related loans. Chart 2 shows the composition of the average bank’s loan portfolio in the Ninth District (blue columns) and for the average bank in the nation (red columns). Agricultural loans made up nearly 30 percent of total loans at the average Ninth District bank in the first quarter of 2018. However, this category accounted for 17 percent of loans at the average bank outside the District. Agricultural lending has been one of the slowest-growing categories over this period, and the disproportionate exposure of Ninth District banks is partly responsible for the slower relative loan growth since 2016. A lower share of commercial real estate lending also contributes to the slower loan growth in the Ninth District relative to the nation. The average bank in the nation had more than 35 percent of its loans in commercial real estate, and the growth of this category has been the fastest of the six types over the past two years. This category of lending is still important to Ninth District banks, comprising nearly 29 percent of the average loan portfolio, but the share is notably lower than the national average. The average annual growth rates in the period from 2016 to 2018 for the various loan categories are shown in Table 2.

Table 2. Average Annual Growth Rate at the Median Bank
Agriculture Residential RE Commercial RE C&I Consumer Miscellaneous
Ninth District 2.6% 1.8% 6.6% 4.3% 0.7% 3.2%
Nation 3.2% 3.5% 8.7% 6.1% 0.3% 3.7%
Source: Bureau of Economic Analysis