Twelfth District loan growth is accelerating to 2006 levels.

October 6, 2022

The second quarter of 2022 saw median loan growth in the Twelfth District. The overall figure – 16% year-on-year, excluding PPP loans – was the fastest pace since 2006. So why the sudden acceleration in growth? Is this a sign of an economic recovery, and what do bankers think of growth in an era of rising interest rates?


A favorable evolution of the asset mix


Banks funded this loan growth primarily with cash on their balance sheets. Banks in the twelfth district had accumulated a lot of cash due to a surge in deposits at the height of the pandemic. They then used this cash to fund loans, which resulted in a shift in asset mix towards loans and away from short-term liquid assets.


Importantly, this shift in asset mix, together with higher interest rates, has benefited earnings, as loans generally have a higher yield than other types of assets held by banks.


Figure 1
Median net loan growth, twelfth arrondissement


Year-over-year percent change in median net loan growth from Q2 2009 to Q2 2022

Growth rates include changes resulting from mergers as well as organic growth.
Source: Bank Call Reports/Uniform Bank Performance Reports.


The Twelfth District led all other districts in loan growth with the highest median rate. Demand for loans may vary from region to region as local economies have recovered at different rates. Places like Salt Lake City, Boise and Phoenix have seen rapid growth, driving demand for commercial real estate (CRE), which includes construction and land development. And the data in our First Glance 12L report proves it. District banks’ loan portfolios continued to be concentrated in CRE categories, including those backed by owner-occupied (OO) and non-owner-occupied (NOO) collateral. At 222% in the second quarter, the district’s median NOO CRE concentration ratio significantly exceeded the national median of 124%.


Downside risks


The downside of loan growth is twofold. First, liquidity on the balance sheet has diminished, which means that banks do not have the same volume of liquid instruments to finance their future growth. If they want to increase lending further, they may need to raise funds in other ways by increasing deposits, borrowing money from sources such as the Federal Home Loan Bank or raising capital. As a result, competition is intensifying on the deposit and lending side. The second drawback relates to risk-based capital ratios, a regulatory measure used to assess capital adequacy. The denominators of these ratios weight the risk of various balance sheet components based primarily on credit risk characteristics. Cash and fixed income securities generally have lower risk weightings than most loan categories. Thus, the change in balance sheet composition tended to increase risk-weighted assets and reduce risk-based capital ratios, all other things being equal.


Inflation is a priority


As we discussed, lending momentum has been strong in the first half of 2022. But the Federal Reserve’s actions to fight inflation could cause a downturn. In the Fed’s Senior Loan Officer Opinion Survey, more than a third of loan officers said they would tighten lending standards for commercial and industrial (C&I) loans and non-conforming jumbo loans in the second half of 2022. In addition, the survey found that inflation topped the concerns of survey respondents: “the most cited reasons for expecting a tightening of standards in the second half of 2022 , all cited by major net bank shares, were an expected deterioration in the debt servicing capacity of borrowers due to higher inflation or inflation risk, an expected deterioration in collateral values, an expected deterioration in the credit quality of loan portfolios, an expected reduction in risk tolerance and an expected increase in exposure to interest rate risk due to higher inflation or risk of inflation.


Other independent surveys suggest increased caution on the part of bankers regarding future loan growth. A late-June survey of community bank executives by IntraFi Network found that 48% of bankers in the West expected demand for loans to decline in the coming year, compared to 26% who felt the same in April.


For more details on economic and banking conditions in the district, see the full First Glance report 12L 2Q22.


Elizabeth Lawson-Kurdy is the Communications Manager for Supervision + Credit within the Communications + Experience team at the Federal Reserve Bank of San Francisco.


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The views expressed herein do not necessarily reflect the views of the management of the Federal Reserve Bank of San Francisco or the Board of Governors of the Federal Reserve System.

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