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Federal Reserve Bank of San Francisco

H 2567
c. 2

Annual Report 1976

H6 2 Slo r

5 3A I

Federal Reserve Bank of San Francisco

Annual Report 1976

federal Reserve Bank
of San Francisco

O 2 j 1977

From the Boardroom

Of all the traditional American virtues extolled during the just­
completed bicentennial year, perhaps none better describes the nation's
econ om ic experience during 1976 than "resilience"-the ability to make
necessary adjustments and bounce back from adversity. The first steps were
taken e v en ear li er, of course, when a stimulative fiscal policy helped to stop
a severe recession, and an accommodative monetary policy helped supp ort
the upturn while limiting a virulent inflation. The results were seen in 1976,
as the resilient American economy recovered its dynamism.



Th e past year admittedly had its problems, including the well­
publicized "pause." But not enough publicity was given to the fac t th at total
ou tp u t, in real terms, .increased faster in 1976 than at any other time of the
p a s t two decades. Again, this recovery year was marred by the con tin uat io n
of a n e ar -r e cor d level of unemployment-yet not enough attention has been
given to the fact that no other period in recent decades, ex cep t the 1 9 73 boom
year, could match 1976 in terms of job expansion. Inflation was and is a
difficu lt problem, but too many commentators last year rem ar k ed on the I \
persisten ce of the problem, and too few on the fact that the infl a t ion rate had
been reduce d more than half in a two-year time -span, and th a t the nation
boasted one of the lowest inflation rates in the industrial w or ld.
Res ilie n ce also characterized the p erformance o f the vast regional
economy ser v e d by the Federal Reserve Bank of S an Fran cisco . The Western
economy had less ground to make up, because it suffer ed less from the
recession than the rest of the nation, yet it managed in most respects to
match the rapid recovery pace of the national economy. In the process,
Western com m er cial banks outpaced other banks w ith a 7-percent gain in
loans and investments, to a year-end total o f $1 1 2 billion . B ank lending for
single-fam ily mortgages and consumer goods and ser v ices was especially
strong, help in g to make up for continued sluggishness in business len ding .

The monetary policy role in this context was designed to reconcile the
sometimes conflicting goals of sustainable growth, stable prices, and high
levels of employment. The results generally were favorable, as e v iden ced in
financial markets by a strengthening of bank balance sheets and a declining
trend in interest rates.
Operating e f f icien cy was another goal of our planning efforts at this
Bank, a s a m eans of consolidating the gains achieved through a major staff
reduction and reorganization in the 1974-75 p eriod. Management in 197 6
developed programs to improve the Bank's long-range planning process,
primarily by adopting a revised five-year automation plan. While providing
for the f u ture in this way, the staff also met the day-in, day-out financial
needs of the West through the continued provision of check , fiscal, coin,
currency and other services.
Our appreciation goes to the finan cial, industrial, academic an d agr i­
cu ltura l leaders who served as directors in 1976, h elping to g uide the B ank
through that comp lex r ecovery year. Special acknowledg m ent is due O.
Mer edith Wilson (Trustee and Retired President, Cen t er for Advanced S tudy
in the B eh a v io r al S cien ces, Stanford, California) who p rovided o ut standin g
service to the B an k as Chairman of the Board of Directors since 1968.
Additionally, we wish to thank others who completed terms as directors
during 1976: A .W. Clausen (President and Chief Executive Officer, Bank o f
America) at our San Fr an ci sco office; Linus E. Southwick (President, Valley
National Bank of Glendale) at Los Angeles; John R. Howard (President,
L e w is and Clark College), FrankL. Servoss (President, Crater National B an k
of Medford), and James H. S tan ard (E x ecutive Vice President, First National
Bank of McMinnville) at Portland; and Roy W. Simmons (President, Zion s
First National Bank) at Salt L ake City. Fin ally, w e wish to e xp ress our
appr e ciation to our o f f icer s and staf f, whose de dica tion to the ef f iciency of
Bank operation s has enabled u s to improve our services to the finan cial
community and to the g en er al public.

Jo seph F. Alibrandi
Chairman of the Board


John J. Balles

National Business Developments
The national economy expanded at a generally strong but une ven pace
last year, continuing the recovery that got underway in early 1 9 7 5 . To tal
output of goods and services, in real terms, in cr eased 6.2 percent-the
sharpest gain of the past two decades, despite a widely publi ciz ed pause that
beset the economy in the latter part of the year. E mploy m en t surg ed to new
peaks, although unemployment r emained at near-r ecession le ve ls. The infla­
tion rate decelerated, but remained too high for the long -term health of the
Real GNP increased at a 9-percent annual rate in the fi r st quar t er, but
then expanded at less than half that rate during the remain der of the year.
This shift was due entirely to fluctuations in inventory investment, because
the pace of final sales (GNP less inventory spending) actually accelerated in
every single quarter. However, this pattern o f g radually reduced stimulus
from inventory spending is typical of almost all cyclica l recoveries.
Much of 1976'8 strength came from a sharp 2 3 -percent increase in re al
spending for new home construction-at least single-family hou sing . I n
contrast, business fixed-investment spending failed to li ve up to expecta­
tions, despite the increased availability of e x ternal and in ternal financing.
The sluggish growth of business capital spending r efl ected cont in ued excess
capacity in many industries, and probably also a w ary sp ending attitude on
the part of business managers in the wake of the severe in fl a tion and steep
recession of the s everal preceding year s . I n a ddition, consumer spending
slowed down in the middle two quarter s of 1976, although households
reduced their saving rate in order to maintain nor m al spending p atterns.


The Federal governmen t continued to stimulate the economy with a
massive $58-billion deficit, but the deficit was about $13 billion less than in
the preceding year as the cycli ca l r ecovery brought about a normal upturn in
income-tax receip t s and a reduction in certain counter-recessionary spend­
ing programs. State an d local governments meanwhile posted an operating
surplus for the fi r st time in the past three years, as they held down their
expenditures while benefitting from a recovery-based increase in tax reve­
nues and higher Feder al g r an t s .
The number of p er son s with jobs increased in 1976 by 2.7 million-one
of the strongest cyclical r eco v er ie s since World War II-but the number of
unemployed dropped only modestly, so that the jobless rate averaged a very
high 7.7 percent for the year as a whole. This high rate was attributable to
the very sharp increase in the nation's labor force, partly due to the econom­
ic recovery which encouraged p eople-especially teenagers and women-to
enter the labor force and look for j o bs . Also, the continued inflation (even
though at a reduced rate) ap p ar en tly forced many family members to look for
work outside the home or school in ord er to make ends meet.
The GNP price index rose 5. 1 percent in 1976-only about half the pace
of the two preceding years, but still a serious erosion of the incomes and
savings of the nation's peop le. Most of the improvement in the consumer
sector was due to a decline in cer tain food prices, such as meat and cereal
products, because prices of o ther commodities and services continued to rise
at a fairly rapid rate. H our ly pay p er worker increased only slightly faster
than productivity or outp u t p er m an hour, suggesting an easing of cost-push
pressures in the economy. Mor e basically, the overall improvement in the
price situation reflected the better p er f or m an ce of the Federal budget and
continued moderation in the g rowth o f the money supply.

Jo seph F . Alibrandi, Chairman of the Board
President and Chief Executive Officer
Whittaker Corporation
Lo s Angeles, California

Bank Credit and Monetary Policy
Commercial-bank credit expanded at a moderate 6.4-percent pace in
1976, the second year of the national business recovery. Loans contributed
over one-half of the increase, although business-loan demand continued
relatively weak for this stage of a cyclical recovery. Banks again increased
their holdings of Treasury securities, moving into intermediate and long
maturities to bolster earning assets and, late in the year, adding tax-exempts
as the tone of the municipal market improved. Banks meanwhile intensified
the shift in sources of funds which they had initiated in the preceding year. A
record savings inflow nearly doubled 1975's large gain, while a reduction in
large negotiable certificates of deposit far exceeded even the previous year's
substantial run-off.
In 1976 as in 1975, a sluggish business-borrowing pace at the nation's
banks contrasted with record or near-record borrowing in other financial
markets. The Treasury concentrated its massive financing in coupon issues,
thereby relieving pressure on short-term rates. New municipal-bond financ­
ing reached a record high as the market became more receptive after the
default fears of 1975, and corporate-bond offerings fell only slightly below
1975's record volume. Continued corporate reliance on the capital market
helped account for the weakness of long-term bank credit demand, while
improved corporate liquidity, cash flows and profits tended to limit short­
term bank loan demand.
The declining rate of inflation and the ample supply of investable funds
placed downward pressure on long-term interest rates, and in December
rates reached the lowest level of the past several years. Short-term rates
remained relatively flat during the early part of 1976, rose steeply in May and
June, and then also declined to a cyclical low at year-end. The prime business­
loan rate lagged the decline in money rates, as banks attempted to maintain a
favorable "spread" (net differential) between their return on earning assets
and their cost of funds. Despite relatively weak loan demand, banks felt
compelled to maintain profit margins large enough to cover continuing high
loan-loss reserve requirements and to offset non-accrual loans (that is, loans
on which interest is not currently being paid). As the year progressed, how­
ever, many banks became more aggressive and began making concessions on
price and other terms of lending.


Monetary policy was designed during 1976 to encourage continued
econ omic exp an s ion while restraining inflationary pressures. The Federal
Reserve ac h ieved, w ith in reasonable tolerances, its monetary growth tar­
gets, as the narrowly defined money supply (M1) expanded at a 5A-percent
rate an d the more broadly based aggregate (M2) rose at a 10.9-percent rate.
(M1 equals currency p lus demand deposits, and M e equals M i plus time deposits
except large cer t if icat es of deposit). The F ed eral Reserve reduced its discount
rate for m em ber-ban k borrowings twice during 1976, to 5 1 percent from 6
percent, in line with the downtrend in market rates. The Sys tem also made
two reductions in reser v e requirements-a lh-percent cut early in the year on
certain tim e certif icat e s, and a 1
14-to -lh percent cut in late December on net
demand depo sit s .
In this m od erately accommodative policy environment, bank credit
increased half again as fast as in the preceding y ear, with loans accounting
for $25 billion of the total $4 6-billion increase . Business loans actually
declined slightly o v er th e cours e of the year (after adjustment for bankers
acceptances). On the o ther hand, mortgage lending was very strong, account­
ing for the large s t sh ar e of the overall increase, and consumer instalment
loans accelerat ed in the latter part of the year. Foreign lending also contrib­
uted to the expan s ion o f loan portfolios at some larger banks.
Bank earnings in 1 9 76 improved considerably over 1975's poor
performance. Banks ac h ieved these higher earnings by maintaining a favor­
able spread between the rates they earned and the ra te s they paid for fu nds,
by making somewhat low er p r o v isions for loan-loss r eser v es, and by gradu­
ally reducing their p or t folios of n on-a ccrual loans . R egiona l retail banks
tended to fare better than nationally-oriented w h oles ale banks, w hich are
more dependent on business len ding. In addition, bank s ac h ieved sign if ican t
cost savings by posting a $19-billion decline in h igher -cos t CD fun ds w h ile
gaining a record $40-billion increase in lower-cost savings dep osits.

John J. Balles, Presid en t
Federal Reserve Ban k of San Francisco


K ey Western Developments
The Western economy expanded at a respectable pace in 1976, although

not w ell enough to utilize all of the resources left unemployed during the

preceding recession. Indeed, the regional jobless rate remained near the

h ighes t levels of the past generation during this start-and-stop recov ery

p eriod. On the other hand, employment, income and sales all rose

s ignif ican tly- an d with inflation subsiding, real household income scored its

f ir s t notable g ain of the past three years.

In this nine-state area served by the Federal Reserve Bank of S an

Francisco, civ ilian employment increased 3 percent during the year, to about

13.6 million. Job gains w er e modest in manufacturing and construction-both

sectors emp loy ed fewer workers than at the pre-recession peak-but open­
ings con tin u ed to increase in trade, services and government. In line with a

long-stan d ing tr en d, th o se thre e sectors accounted for 65 percent of all

payroll emp loym en t, compared with less than 59 percent a decade ago.

D e sp ite the o ver all j ob exp an sion, unemployment averaged 9.2 percent ofthe

ci v ilian labor fo rce-close to the r ecession peak and almost two p ercentage

points abov e the average rate recorded elsewhere. This differential r eflects

certain str uctur al problems affecting the West, such as heavy inmigration, a

relativ ely you th f u l labor f orce, and a long-term downtrend in job opportuni­
ties in the key aerospace-manufacturing industry.

Wes t ern p ersonal income increased almost 10 percent to about $2 30

billion in 1 9 76. Much of the increase was eaten away by inflation as consumer

prices rose about 6 p ercent during the year-but that figure comp ared w ith a

10-percen t r ate of inflation in each of the two preceding years. Consumer s

purchased almo s t 1 3 p ercent more g oods at retail, despite a sum m er-fa ll

slowdown, w ith busine ss being som e w h a t stronger in durable than in n on du ­
rable stores. Auto sales increased su bs tan tially; in California, n ew auto

r egistra tions ro se far above the 1974-75 level to about 900,000 un it s, al­
though sales st ill lagged far behind the pace of the early 1970's.

Dorothy Wright Nels on , Director
Dean and P rofe ssor
Univ ersity of Sout hern
California Law Center
Los A ngeles, Ca li fo rn ia





Aerospace Trends
Western factory output, after declining only modestly dur ing the 1975
recession year, reached new highs on the strength of an l I-percent gain
during 1976. (Production increased at a comparable pace elsewhere, but
from a much lower base because of the greater severity of the recession in
other parts of the countrv.) Strong gains were recorded by regional manu­
facturers of machinery and transportation equipment, offsetting sluggish­
ness in other industries such as primary metals.
The West's crucial aerospace-manufacturing industry ended the year
on a bright note after a rather weak beginning. Aerospace jobs declined
during the first half of the year, reflecting continued cutbacks in
commercial-aircraft business, but then turned upward again as orders began
to be received from a number of sources. Still, industry employment failed to
recover to the 1974 pre-recession level and remained 26 percent below the
Vietnam-war peak.
The second-half turnaround in orders partly reflected a revival of air
passenger traffic, which triggered a rebirth of the airlines' interest in new
transport planes. In addition, increased military and consumer purchases of
new electronic products supported the recovery which had gotten underway
the year before in that sector of the industry. But most im portantly, govern­
ment spending provided a strong stimulus to the market. Military prime­
contract awards rose by over 6 percent during fiscal 1976, on the heels of a
sharp upsurge the preceding year, as a number of ongo ing missile and
aircraft programs received increased funding. Space-agency awards rose
even more strongly, primarily for the development of the space-shuttle
program. Combined military and space awards have now increased almost
by half in just over two years' time, providing a strong foun da tion for the
1977 regional economy.

Malcolm T. Stamper, Director
President, The Boeing Com p an y
S eattle, Wa shington

Western Construction
The Western construction industry reported very mixed results in 1976.
Residential construction contracts increased about 60 percent, in dollar
volume, but nonresidential construction declined slightly and public-works
spending dropped about 19 percent during the year. Here as elsewhere,
business plant-equipment spending lagged behind expectations. Businesses
had considerable incentive to build, because of rising sales and profits and
the need to offset higher labor and energy costs. On the other hand, overca­
pacity remained a threat for many commercial and industrial projects, while
environmental demands caused the delay or even cancellation of some
building plans. A drop in public-works spending for highways and other
projects r ep resented one facet of the drive by hard-pressed states and
municipalities to bring their budgets under control.




In contrast, home-builders had trouble keeping up with demand in
some Western areas-especially Southern California, scene of many a past
land boom. In certain localities, housing prices were half again as high as
they were two years ago. Yet in the face of soaring prices, the number ofnew
homes sold rose to new peaks, about 33 percent above year-earlier levels. In
this boom atmosphere, builders filed for 47 percent more housing permits
than in the preceding year, and thus gave a running start to 1977 housing
Ample financing, evidenced by some easing of interest rates, provided
strong support for the housing boom. Households, attracted by the relatively
high rates availa ble on savings accounts, poured record amounts of funds
into banks and thrift institutions; such accounts at Western savings and loan
institutions rose 21 percent ($12.9 billion) above the 1975 figure. Lenders
committed most of those funds to single-family mortgages, and presaged a
continuation of the boom by maintaining a very high level of mortgage
commit m ents at year-end.


Clair L. Peck, Director
Chairman of the Board
c.i.. P eck Contractor
Los Angeles, California



Forest Products

The nation's incipient housing boom brought about a significant mea­
sure of recovery for the Western lumber industry. Nationally, housing starts
increased 33 percent, to 1.54 million units, and the rise was even s trong er in
most Western communities. More importantly, the upturn was heavily con­
centrated in single-family housing-a heavy user of lumber-rath er than in
the still-depressed apartment market.
The result was a 13-percent production gain for the region a l lumber
industry, although output still remained well below earlier peak levels.
Demand rose sharply in early 1976 as wholesalers increased pur chase s in
expectation of a pickup in housing, and then after a pause, strengthened
again in late 1976 as the single-family housing boom gained mom entum.
Softwood lumber prices rose sharply, reaching a point 51 percent abo ve the
late-1974 recession low, because of this strong housing demand as well as
rising timber costs.

Pulp and paper prices rose an average 5 percent for the year. But given
the high costs of energy, raw materials and pollution-abatement equipment,
the industry was unable to earn a high enough return to justify sign if ican t
additions to capacity. In fact, the present high level of demand an d n ear ­
capacity level of operation suggest that the public may soon experience tight
supplies ofpaper products.

Congress passed the National Forest Management Act in October,
thereby easing widespread fears about future tim ber supplies. Th e leg isla­
tion obviated several Federal court decisions which had severely limited the
practice of clear-cutting by insisting on strict adherence to leg islation
passed in the 1890's. The new law, while calling for progressive manage­
ment practices, alleviated the danger of restricted supplies and sh arp ly
higher costs for the industry.

Charles R. Dahl, Director

Pre sident and Chief Executive Officer

Crown Zellerbach Corporation

San Francisco, California

Metals and P etroleum
Nonferrous-metal producers recorded mixed results. In the aluminum
indus try , demand p ick ed up suffici en tly by m idy ear to permit the restoration
of full-capacity operations, althoug h order inflows became rather sluggish
later in the year. In the copper industry, in contrast, operations remained at
a relatively low level of capacity due to the enormous stocks on hand at
refineries throughout the world. A ll metals producers posted significant
increases in list prices during 1976, but in many cases the markets were not
strong enough to support such increases, and consequently, widespread
discounting ensued.
Western steel pro du ct ion increased a disappointing 3 percent in 1976
following two years of steep decline. Orders from consumer-goods manufac­
turers turned sluggish in the second half, while demand from other steel
users, such as the cap ital-goods and heavy-construction industries, re­
mained in the doldrums throug h o u t the year.
Western consump tion ofp etro leum products increased during the year,
partly because of the growing industrial demands created by the continuing
business recovery, but also because of the regional utilities' increased reli­
ance on fuel oil as a result of the natur a l-g as shor tag e . Refinery output rose
more than 4 percent, with an increase in imports more than offsetting the
continued declin e in dome stic crude production. I n deed, foreign oil supplied
a record 48 percent o f t h e regional market-a share which will probably
decline when Alaskan oil begins to reach West Coast markets in late 1977.
Planning continued f or the We s t Co ast refineries, marine terminals and
other facilities that will be required t o dis tribute Alaskan oil to the nation's
markets, and meanwhile, dr illing activity picked up in Federal waters off the
Southern Californ ia coast .

Cornell C. Maier, D eputy Chairman
President and Chief E x ecutive Officer
Kais er Aluminum and Chem ical Corporation
Oakland, California




Western Farm Develop men ts
Western farmers and ranchers, like their co un terp ar t s elsew here, had
trouble making ends meet in 197 6 as rising p r oduction expen ses at e up most
of their gains in cash farm marke ting s . Y et despite weak en ing farm incomes,
the agricultural commun ity rem ain ed in much stronger shape than in the
days before devaluation expande d far m sales potential by reducing the
prices of American products on world markets . Wes tern farm m ark et in g s, at
$15.3 billion in 1976, thus reached ro ug h ly d ouble the le v e l of 1970.
The farm situation in 1975 was marked by ver y h ea v y supplies, and
hence downward price pressures. Fa v o ra ble ratio s o f livestock to feed prices
in the preceding year resulted in larg e increases in meat p roduction in 1976.
Beef output was high, p ar tly because o f in cr eased market ing of grain-fed
cattle, but also because of cutbacks in bree ding h erds, w h ic h cattlemen had
overbuilt in the early 1970's. The resu lting addition to la s t year's meat
supplies helped cause a 10-percent d ecline in bee f ca t tle prices over the
course of the year.
Farm crop prices fell nationally by 4 percent during 1 9 7 6, but some
Western farmers faced even steeper price declines. A record fall-potato crop,
about 10 percent larger than last year's, sen t prices stum bling 21 percent
over the course of the year. Heavy wheat supplies brought about a 27­
percent decline in wheat prices-but in contrast, the combination of a small
cotton crop and rising worldwide demand led to a 38-percent price hike for
that key fiber.
Natural disasters also influenced th e Wes tern scene. I n Idaho, the
Teton Dam break had serious consequences, bo th in loss of lif e and loss of
valuable housing, livestock and crop lan d . Californ ia 's production was cut
severely by a prolonged drought, w h ich dam aged dry -lan d crops and dried
out pastures, and also by a peak-season cannery strik e an d un s easona ble
late-summer rains.

Ronald S. Hanson, Director
President and Chief Executive Officer
First National Bank of Logan, Utah

Western Lending
Western banks, amidst a stop-and-go business recovery, ran slightly
ahe ad of other banks in extending credit last year. After a slow first quarter,
total credit expanded steadily for a 6.S-percent ($7.0 billion) yearly gain.
This increase reflected the growing strength of the regional economy as well
as the tra ditional emphasis of the region's extensive branch-banking system
on such fast-growing fields as mortgage and consumer lending.
Loans played the dominant role in this credit expansion, contributing
SO percent of the overall gain with a 7.6-percent ($5.9 billion) expansion. In
contrast, securities investment was relatively unimportant last year. West­
ern banks had already re-built their liquidity in 1975 through massive
investment in short-term Treasury obligations, so in 1976 they concentrated
more on building their portfolios ofmunicipals and intermediate and longer­
term Treasury issues.



In the We st as elsewhere, business loans lagged, rising by only 1
percent. Western firms began the year with excess plant capacity, liquid cash
positions and a cautious attitude toward capital outlays, and this tempered
their bank credit demands. In the fourth quarter, however, commercial
lending advanced strongly with a broad-based expansion. Still, domestic
lending was somewhat overshadowed by the large increase in business
loans made to overseas borrowers.
We s te rn banks played a large role in meeting the strong demand for
real-estate loans, particularly on single-family homes. Indeed, mortgages
accounted for nearly one-third of the total loan increase last year, following
an unusua l net decline in 1975. Consumer loans also increased, especially for
auto and credit-card purchases, as households became more willing to take
on instalment debt and as banks offered new inducements to attract this
profitable type of business.

Frederick G. Larkin, Jr ., Director
Chairman of the Board and
Chief Executive Officer
Security Pacific National Bank
Los Ang eles, California



Deposit Trends
Western banks encountered little difficulty in attracting funds in 1976.
Total deposits increased at member banks by $3.3 billion (4 percent) as
savings inflows sharply expanded, but the increase was only half as large as
the 1975 gain due to a $5.0-billion run-off of large certificates of deposit. For
the second successive year, private demand deposits rose at twice the na­
tional rate.
The massive $8.5-billion inflow of savings exceeded even 1975's West­
ern bank expansion. Interest-rate differentials were a major consideration:
investors channeled interest-sensitive funds from money-market instru­
ments into savings deposits, capitalizing on the favorable 5-percent ceiling
rate and the greater flexibility of savings deposits compared with fixed­
maturity instruments. State and local government units alone added over $1
billion to their savings accounts late in the year. Corporation s took advan­
tage of their recently authorized authority to hold funds in savings accounts,
and at year-end held over $1.4 billion in that form.
Member banks' required reserves declined approximately $120 million
in 1976, reflecting predominantly the growing proportion of savings depos­
its, which carry a relatively low reserve requirement. Banks had little need
to borrow reserves at the Federal Reserve Bank of San Francisco's discount
window, and average daily borrowings fell to the lowest point of the pas t 14
years, at $5 million. For one reason, banks were able to borrow more
cheaply in the market at the Federal-funds rate than at the discount window.
In addition, an expanding economy and a generally accommodative mone­
tary policy permitted a build-up of banks' reserve and liquidity positions to
the point where relatively little borrowing of any kind was necessary.
Carl E . Schroeder, Director
Chairman of the Board
First National Bank of Orange County
Orange, California

Bank Earnings and Outlook
In 1976 as in 1975, Western banks generally achieved income results
above the national average, especially from retail-oriented lending opera­
tions which provided advantages not shared by large national wholesale
banks. Along with their counterparts elsewhere, Western banks benefited
from the favorable spread between what they earned on assets and what
they spent for funds, reflecting the lagged reductions in the prime business­
loan rate and limited reductions in mortgage rates. Tighter control over
expenses also contributed to improved profit margins.
The profit picture was not completely pleasant, however. Many banks
felt forced to add almost as much to loan-loss reserves as they did in record­
breaking 1975. Again, many suffered earnings declines because of actual
loan losses and increases in non-accrual loans. While substantial cutbacks in
CD issuance reduced interest costs on those deposit liabilities, payment of
the 5-percent ceiling rate on the record flow of savings deposits became very
expensive at those times when market interest rates fell below 5 percent.
As they entered 1977, Western banks appeared primed to benefit from
the generally promising economic outlook. Demand for mortgage financing
is expected to remain strong for single-family units, and a modest turna­
round is projected for apartment mortgages as well. The improving employ­
ment picture and the expected tax cut should encourage consumers to in­
crease their spending and their willingness to add to debt. This in turn
should generate business-loan demand for inventory financing, and could
also trigger the long-awaited increase in term-loan demand to finance
business plant-equipment expenditures. Overall, Western banks are looking
for an acceleration in the rate of loan expansion, which should offset a
possible narrowing in the "spread" as interest rates on funds and other costs


Gilbert F. Bradley, Member
Federal Advisory Council
President and Chief Executive Officer
Valley National Bank of Arizona
Phoenix, Arizona

Federal Reserve Operations
The Federal Reserve Bank of San Francisco completed its 62nd year of
operations in 1976, as it continued to provide central-banking services­
such as checks, coin, currency, fiscal, and electronic funds transfers-for an
expanding regional economy. The Twelfth District, with its five locations in
San Francisco, Los Angeles, Portland, Salt Lake City and Seattle, is the
largest Federal Reserve District in terms of both population and geographic
size. It includes the states of Alaska, Arizona, California, Hawaii (with
Guam and Samoa), Idaho, Nevada, Oregon, Utah and Washington, with 33
million people as well as 486 banks and 6,753 banking offices.
The District expanded in 1976 to take in the five southeastern counties
of Arizona, which were formerly served by the El Paso Branch of the Dallas
Federal Reserve Bank and are now served by the Los Angeles Branch of this
Bank. The shift took account of the growing western orientation of Tucson
and its surrounding area-practically all banking offices in that area are
headquartered in Phoenix, which is in the Twelfth District. The change in
boundaries will substantially improve services to Arizona member banks
and reduce the float created by present delays in check collection.
The scope of operations in 1976 reflected the vast size of the Bank's
serving area. For example, Bank staff handled over 1.2 billion paper checks,
not to mention 1.4 billion coins and almost 700 million pieces of currency. At
the same time, the Bank continued to extend its electronic payments capabil­
ity, through such means as automated clearing houses, Government direct­
deposit programs, and the Federal Reserve wire-transfer network.

John B. Williams, First Vi ce President
Federal R e serve Bank of San Francisco


District Departments
During the year, 3 national banks, 19 state nonmember banks and 2
trust companies were organ ized in the District. The number of Federal
Reserve member banks and the number of member bank offices each in­
creased, to 144 banks and 4,884 offices. Meanw h ile, bank holding companies
supervised by the S an Francisco Reser v e Bank declined slightly, from 73 to
71 , over the course of the year. Regulatory personnel sharply expanded the
scope and coverage of bank holding company supervision, and implemented
a comprehensive system for monitoring current developments at District
financial institutions. This move strengthened the early-warning capability
of the Bank's member-bank surveillance system.
The Bank's management and staff made a strong effort to halt or
reverse the decline in Federal Reser ve membership. Bank-relations person­
nel completed a number of cost-of-membership analyses in an effort to show
potential members the benefits of System membership. Through these and
other efforts, the Bank gained six new members during the year.
In the international field, Bank staff supervised 22 Edge Act
corporations-bank or holding company subsidiaries which are engaged in
international banking activities. Our examiners visited three foreign coun­
tries to conduct examinations of branches and subsidiaries ofmember banks
and Edge corporations. Meanwhile, President Balles made a month-long trip
to six Pacific Basin countries to discuss regulatory problems with foreign.
central bankers as well as U.S. commercial bankers.
The Bank's consumer affairs unit, organized during 1975, enlarged its
scope of operations during the year. In effect, the unit has become the
Western information center for Federal consumer-banking regulations.
During 1976, the unit responded to over 3,500 inquiries, handled approxi­
mately 300 consumer complaints, and made numerous educational presenta­
tions to creditor and consumer groups. In addition, four Westerners now
serve on the Federal Reserve's Consumer Advisory Council, established by
Congress to advise the Board of Governors regarding the implementation of
legislation passed under the Consumer Credit Protection Act.
K ent O. Sims, Senior Vi ce Pre sident
(Di strict Departments)
Federal Reserve Bank of San Francisco





Corporate Staff
To provide more effective management, the Bank further strengthened
its system of controlling expenses and staff levels. As a follow-up, in 1977
the Bank will implement an automated, internal responsibility system and a
Planning Control Accounting System (PA CS) for reporting its expense and
budget data to the Board of Governors. Management also emphasized pro­
grams to improve the Bank's long-range planning process, partly through
the adoption of a revised five-year automation plan. This program calls for a
District-wide approach to providing all automated services, commonality of
computer hardware and operations, centralization of major District
computer-systems development, and promotion of District-wide and
System-wide resource sharing.
The Bank's computer specialists helped make a success of a new
Federal program of direct deposit of social-security checks, which involves
2,000 financial institutions and one million recipients in this District. The
Bank is now able to transfer social-security payments directly from the
Treasury to each recipient's checking or savings account in a financial
institution of the latter's choice, thereby saving time and expense and
eliminating the danger of loss or theft for those on social security. This
program builds on the experience that the Bank's staff has already obtained
with other recurring payment programs, such as Federal civil service,
railroad retirement, Federal revenue sharing, and Air Force payroll and
retirement programs.
In automated clearing house (ACH) activities, the District cleared an
average of 85,000 commercial items each month and 1 million government
items per month during the latter part of the year. This work should grow
considerably as the system expands to five clearing houses for commercial
use, one for each of the Bank's five offices.

John J. Carson,
Senior Vi ce President
(Corporat e Staff)
Federal R e serve Bank
of San Franci s co


Branch Operations
Branch operating personnel expanded on the gains they achieved in
the productivity drive initiated during the 1974-75 period. According to the
broadest measure of bank operating efficiency, aggregate output per man­
hour, the San Francisco Reserve Bank ranked first in the Federal Reserve
System in 1976, with cash and check operations especially efficient. Opera­
tional efficiency was helped by the adoption of new currency-counting
equipment and high-speed check-processing machines.
In check processing, Bank staff handled over 1.2 billion paper checks,
and dollar volume jumped 28 percent to $417 billion. Almost all of the checks
flowed through the Bank's network of check processing centers, which
make possible one-day check clearing as well as lower check-handling costs
for commercial banks. During the year, the San Francisco RCPC expanded
its immediate-payments boundaries to include banks located in Hawaii and
In other payments activities, District member banks settled over $5.4
trillion through the Federal Reserve wire-transfer system-a 20-percent
increase over 1975. Yet, despite this increase in use of checks and electronic
transfers, the Bank continued to handle substantial amounts of coin and
currency, receiving and counting 1,389 million coins and 698 million pieces
of currency.
In its role as fiscal agent for the U.S. government, the Reserve Bank
handled a greater dollar volume but fewer pieces of paper than in the
previous year. This included a 28-percent drop in the number of marketable
Treasury securities handled, reflecting savers' decreased interest in such
issues because of declining interest rates. The number of coupons processed
under the food-stamp program dropped 18 percent, partly because of the
growing use of larger-denomination coupons by food-stamp recipients.
Gerald R. K elly ,
Senior V ice Pre sident
(Branch Op erations)
Federal R e s erve Bank
of San Francisco


Summary of Operations

Value (mill ions)

Coin and Currency
Coin received and co u n ted
Currency received and counted




Number (thousands)



259,104 + 1,0 6 2 ,0 30


Check Collections
Commercial bank checks
Government checks t
Return I terns
Noncash Collections


Discounts and Advances
Total discounts and advances
Daily average borrowings
Number banks accommodated





27 t


229 tt
38 tt

Fiscal Agency
Savings Bonds & Savings Notes
Other Treasury Issues
Other Fiscal
Currency verified and destroyed
Federal tax deposits processed
Food stamps received and processed








2,29 1

{- 431,180

385,93 1



! 2,062



Transfer of Funds
Wire transfers
t Including postal money orders
tt Actual number


The Federal Reserve carries out its central­
banking functions through a nationwide
network of 12 Federal Reserve Banks and
their 25 branches, under the policy guidance,
coordination and general supervision of the
Board of Governors in Washington, D.C. At
the Head Office of the Federal Reserve Bank
of San Francisco, the Board of Directors
brings management expertise to the task of
overseeing Reserve Bank operations, and it
also provides first-hand information on key
developments in various geographic regions
and industrial sectors, complementing the
Bank's internal research efforts. In addition,
it gives advice on the general thrust of
monetary policy, especially with regard to the

Bank's discount rate. The Board specifically
has responsibility for initiating changes in the
discount rate, subject to review and approval
by the Board of Governors.
Each of the Reserve Bank's branches outside
San Francisco also has a Board of Directors,
which reports to the Head Office Board. The
Branch Boards have oversight responsibility
and provide Bank management with advice on
policy, business and financial conditions, and
operational matters.

Organization Chart
January 1, 1977


District Departmente

Senior Vice President

District Departments

Kent O. Sims

Vice President
Super., Reg., & Credit

Vice President

Starietical & Data Servo

Wilhelmine von Turk

Henry B. .Jarruson


Vice President &
Director of Research

Robert C. Dietz

Michael W. Keran

Director SHe


Harry W. Green


Bank Examinations

Eugene A. Thomas

Merle E. Borchert
Rodney E. Reid
Wayne L. Rickards
G. Ross Varoz

Vice President
Bank Relations

Credit & Consumer
Affairs Officer
Oscar P. Celli

Director of

Public Information

William M. Burke


Asst. Vice Pres.
& Economist.

Research Officer
Peter Hsieh

AVP & Asst.
Dir-ector of Res.

Harig-Sheng Cheng

Roy A. Karlsson

Joseph H. Bisignano

A.dmin. Officer
Adelle Foley

Asst. Vice Pres.
& Economist.
Robert A..Johnston

Research Officer
Herbert R. Runyon

Branch Operations
San Francisco

Senior Vice President.

San Francisco

Wesley G. DeVries

Vice President.
Analysis - Control
Warren H. Hutchins

Vice President.
Claude Woessner

Asst. Vice Pres.
Michael J. Murray


Asst. Vice Pres.
Roy A. Remedios


Vice President.


.James J. Curran

Asst. Vice Pres.

Admin. Services

Kenneth L. Peterson


Cheek Officer
Robert. H. Colfelt

Asst. Vice Pres.


E. Ronald Liggett.

Analysis and
Control Officer
A. Richard Tidwell

Asst. Vice Pres.
Branch Operations
H. Peter Franzel


San Francisco Head Office
Board of Directors

Frederick G. Larkin, Jr., Chairman of the
Board and Chief Executive Officer, Security
Pacific National Bank, Los Angeles,

Chairman of the Board and
Federal Reserve Agent
Joseph F. Alibrandi, President and Chief
Executive Officer, Whittaker Corporation,
Los Angeles, California.

Dorothy Wright Nelson, Dean and Professor
of Law, University of Southern California
Law Center, Los Angeles, California.
Clair L. Peck, Jr., Chairman of the Board,
C.L. Peck Contractor, Los Angeles,

Deputy Chairman
Cornell C. Maier, President and Chief
Executive Officer, Kaiser Aluminum and
Chemical Corporation, Oakland, California.

Carl E. Schroeder, Chairman of the Board,
The First National Bank of Orange County,
Orange, California.

Charles Raymond Dahl, President and Chief
Executive Officer, Crown Zellerbach
Corporation, San Francisco, California.

Malcolm T. Stamper, President, The Boeing
Company, Seattle, Washingtori.

Ronald S. Hanson, President and Chief
Executive Officer, First National Bank of
Logan, Logan, Utah.

Member of Federal Advisory Council
Gilbert F. Bradley, Chairman of the Board
and Chief Executive Officer, Valley National
Bank of Arizona, Phoenix, Arizona.

Boo rd of D ireclors - - - - - - -­

Ge ne r a l A ud itor
J a mes F. Levrna n


_ _ _ _ _ _----, P re s id e nt - - - - - - - - ­

Om bu d sm an
-Ian e W, La nz bom e

.Io hn J . Ba lles

F irst V ice P r c s i d c nt
J ohn B. Willia ms

Corporat e Staff



Vice Presid en t

& Gener a l Co un s e l

L ouis F:. Hei11 y

S ecretary's Office

S en io r V ice P re s id e n t
Cor po ra te S t a ff

Se n ior Vice President
Bra nc h Operations
Ge ral d R. Kelly



Facilities Planning
Rix Maurer, Jr.

Senior Vice Presid en t
Computer Services

S en io r Vi ce P r-csldc n t

Richard T. Griffith

Dona ld V. Ma sten

J . Ca rso n

Vice Pr1es id e nt

Budg et & Co n t ro l

Th oma s E, J udce

As s t. Vice Pre s.
Facili t. Pl anni n g
Willia m K. Ginte r

Secr et a ry' s Offi ce


Vi ce
P e r so n ne l

Wa lter G. Woodbu ry


Co m p ut e r Systems

Kennet h A . Grant

Assoc. Ge ne ra l
Couns el
Willi m L. Cooper

---=-_A s si s tan t
Gener n l Aud itors
Beverly .J. Adam s
Bruce H. T hompso n

Asst. v tce P res .
Cor p, Pl anning
Wilham S. T h u rlow

Dir ect or

Computer Op e r ation s

Hector M . Mar tin

A sst. Vice Pres ,
S u ppo r t Servi ces
Keith B Da vis

Asst. V ice Pr es ,
Le gi s . Ana ly s t
Ve rle B. J oh ns ton

As st. V icc P res .

Sy s te m C oo rd .

El wood E. Bern s tei n

As st . Sec r e ta ry
T o Bo a r d o f Di r.
Vera J . Tayloe

A sat, Gen eral

Co unsel
W. Gordon S m ith

Vi~ e

S enio r
Pres ide n t
Los An geles
Richa rd C". Dunn

L os Angeles

Vice Pr caldent
Operation s
James M. Da v is

Distr ict Sec ur ity
Office r
Georg-I: P. Gall owa y

Admin. Services
Richard L. Rasmussen

Ba n k & P ub lic
S e rv ices O ffi ce r
Pa u l A . Gra ven

Asst . Vi ce P res.
Anal y si s -C ontr ol
J oh n R. Cola

Check Officer
Marcia E. Broderick

Ca s h Offi cer
Bren t M. Dux bury


Vice Pres id e nt
Portla nd
Ange lo S. Ca rella

A1414t. Vice P r es .
Admin. Ser v ices
C, Petersen

~I ay n a rd

Salt Lake City

A s s t. Vice Pre s .
A naly si s -C ont r ol
H. Willia m Penni ng to n

Operat io ns
M. Timothy Ca rr

F is ca l O ffice r
P a tsy L. Ha yn es

Vice Presid ent
Salt Lak e City
A , G ra nt Hol man

Asst . V ice P res.
Op era t ion s
Don W. Sheets
Ana ly s is -C o n tr ol

o rnee­

Dougla s O. Kn ud sen

Admi n . Se r vices
O ffic er
J .W. Willia ms. -Jr.


Los A ngeles Board of D irectors
Chairman o f the B oar d
J.R. Vau gh an, Presiden t , Knudsen
Co rpora t io n , Lo s A n g e les .

Harvey A. P r o ct o r , Chairman of the Board,
Sou t h e r n Ca li fo r n ia Gas Co m p a n y , Los
An g e le s .

Caroline Leonetti Ahmanson, Pre s id e n t ,
Ca r o li n e Leone t t i Ltd., Los Angele s .

Ar m a n do M. Rodriguez, President, E a s t Los
Angeles Co ll ege , Los Angeles.

Rayburn S. Dezember, Chairma n o f the
Board and President, America n N a t ional
Bank, Bakersfield, Califor n ia .

Seat ed: Rodriguez, Ahmanson, Dezember
S tan d in g: Pinola, Vaughan, Ferguson, Proctor

W. Go rdo n Ferguson, Pres ident, Natio n a l
Bank o f Wh it tie r , Wh it t ie r , Califo r n ia .
Joseph J. P inola , Pres ide n t and C h ief
Ope r a t in g Offi ce r , U n it ed Californ ia Ba n k ,
Los Angeles.

Salt Lake City Board of D irectors
Chairman of the Board
Sam H. Bennion , President, V-I Oil
Company , Inc., Idaho F alls, Ida ho.
Robert E. Bryans, Chairman of the Board and
Ch ie f Executive Officer, Walker Ba n k and
Trust Company , Salt Lake City.
David P. Gardner, President, U n ive r s ity of
Uta h , Sa lt Lake City.
Theodore C. Jacobsen, Partner, Jacobsen
Cons truction Company , Salt Lake City.
Mary S. Jensen , Chairman of the Board,
Idaho State Bank , Glenns Ferry, Idaho.

Seated: Bennion, Jensen
Standing: Gardner, Bryans, Jacobsen

Seattle Board of Directors
Ch a irm an of the Board
Ll oyd E . Cooney , Pre sident and General
Ma n a g er, KIRO-Radio & Television, Seattle .
Douglas S . Gamble, President and Chie f
E xecu tive Officer, Pacific Gamble Robinson
Co., Seattle.
Harry S. Go od fe ll ow , Chairman of the Board
and Chief Executive Officer, Old National
Ban k of Wa s h ington, Spokane, Washington.
Thoma s Hirai, Grower, P acker, Shipper of
Potatoes, Quincy , Washington.
Ru fus C. Smit h , C h a ir m a n of the Board, The
F ir s t National Bank of E n u mclaw ,
E num cl a w , Wa shington.

Seat ed: Co oney, Goodfellow
S t an din g: S m ith , Gamble, Hirai

Portland Board of Directors
Chairman of the Board

Lo r a n L. Stewart, Director , Bohemia Inc.,

Eugene, Or e go n .

Dr. Jean Mater, Partner, Mater E ngin eerin g ,

Corva llis , Oregon.

Kenneth Smith, General Manager, The

Co n feder a t ed Tribes of Warm Springs , Warm

Springs, Oregon.

Robert F . Wallace, Chairman of the Board,

First National Bank of Oregon, Portland.

R obert A. Young, P resident, Northwes t

Na ti o n a l Bank, Vancouver, Washington.

Seated: Stewart, Mater
S tan din g : S m it h, Wallace, Young

Comparative Statement of Condition
December 31,

(th ousands o f d ollar s)

Asset s



Loans to Me m b e r Banks:
S ecured by United States Gove r n m e n t and Agency o b ligatio ns
O the r eligible p a per

Other pape r






85 1,421



13 ,011,444

Cash items in process of colle ct io n

Bank premises

O p e r a t in g equipment




O t h e r assets:

Denominated in foreign currencies

All other

Total Assets






Gold cer t ifi cate account
Special Drawing Rights certificate account
Federal Reserve notes of other Federa l Reserve banks
Other cash

Federa l Agency obliga t io n s
United States Government securities:




Total United States Government securities
Total loans and securities



Federal Reserve notes

Member bank-reserve accounts
United States Treasurer-general account
Other deposits
Total deposits



4,65 1,857

Deferred availability cash items

Other liabilitities

Total liabilities









Capital Accounts
Capital paid in


Total liabilities and capital accounts
Contingent liability on acceptances purchased for
foreign correspondents


Earnings and Expenses

December 31,

(th o u sa n d s of dollars)

Cur r en t ear n in g s

879,6 19
3 ,5 8 6
$883,50 6


T otal current expens e s
Less reimbursement for certain fiscal a gency and o t h e r expenses
Net expenses

$ 6 3,151
$ 58,22 7


Discounts a n d advances
United S t a t es Go ver n m e n t s ecurities
Foreign currencie s
A ll othe r
To t al cur r en t earnings

Cur ren t expen se s

Profit and loss
C u r r e n t net earnings


$825 ,2 79


Additions to current n et earning s:

Profit o n s a le s of United S tat e s Gov ern ment secur it ie s (n e t)

Profits o n foreign e xch a n ge t rans actio n s

A ll other

To ta l additions





D ed u ctio n s from current net e a r n in g s:

Loss o n foreign exchange t ransactions (n e t )

Loss on sales of United States Government s ecu r it ies (n e t)

All other

To ta l d eductions
N et additions (+)/ deductio n s( ~)
N e t earnings before payments to U n it ed S t a t e s Treasury
Dividends paid
Payments to United S tates Tre a s u ry
(interes t on F ederal Reserve notes )


$ 3, 2 16
$ 1,6 63
7,5 19
$8 0 1,762


T rans ferr ed to s u r p lu s

S urp lus D ecem be r 31

Surp lu s Jan ua r y 1


$ 17 ,6 6 1







Federal Reserve Bank of San Francisco
P.O. Box 7702 San Francisco, California 94120




Salt Lake City

San Francisco

Los Angeles

I daho-Neoada-Oregon-Ut.ah-Washington

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One Embarcadero Center, San Francisco
Design by The GNU Group
Edited by William Burke, Karen Rusk

Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102