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FRBSF WEEKLY LETTER Number 93-16, April 23, 1993 California Banking Problems 1992 was a record earnings year for the u.s. banking industry, but one that many California bankers would rather forget. Over 93 percent of the nation's 11,382 commercial banks reported a profit for the year. Industry performance was bolstered by improvement in the economy, record net interest margins, and steadily improving asset quality. In contrast, only 69 percent of California's 450 banks were able to record a profit for 1992, as earnings were depressed by ongoing asset quality problems. This Weekly Letter examines the divergence in 1992 bank performance between California and the nation. California banks have been hurt by the weak California economy and by their relatively heavy exposure to real estate lending. In 1992 small banks operating in Southern California's metropolitan areas experienced the most serious deterioration in performance, a finding that is consistent with economic conditions in Southern California relative to the rest of the state. Record year for the industry Nationally, wider net interest margins, improved asset quality, and asset growth came together to generate a record $32 billion in earnings in 1992, up from only $18.3 billion in 1991. As a result of these strong earnings fundamentals, return on assets (ROA), which measures the net income per dollar of assets, climbed to an industry record of 0.94 percent for the year, a dramatic increase from the 0.54 percent ROA recorded in 1991. Bank earnings were boosted over $8 billion by the large increase-24 basis points on averagein the differential between interest rates that banks earned on their loans and investments and the costs of funding those assets. Lower interest rates in 1992, and a shift to a funding mix with more equity funding and a larger share of lower cost retail deposits, resulted in a much larger WESTERn BAnKinG decline in interest expense than in interest income. The problem loan ratio for total loans (defined as loans 30 days or more past due plus loans no longer accruing interest divided by total loans) at banks has now fallen for seven consecutive quarters. From year-end 1991 to year-end 1992, this ratio fell from 6.12 percent to 5.07 percent; and despite the sluggish economic recovery, problem ratios declined for real estate, business, and consumer loans. The improved outlook for credit quality allowed banks to reduce their 1992 expenses for provisions for building loan loss reserves by nearly $8 bill ion from 1991 expense levels. u.s. California's problems California has accounted for a large share of the nation's job losses since the onset of the recession and it has been slow to show signs of recovery. With the slump in the California economy, earnings of banks in the state continue to lag those reportingmtionally. Overall ROA for banks in the state was 0.58 percent last year (this excludes first quarter losses by Security Pacific, before its acquisition by Bank of America). Although this ROA is about triple the earning ratio posted in 1991, it is well short of the national figure. Also, nearly 31 percent of the state's banks, including two of the state's ten largest banks, reported losses in 1992, compared to only 25 percent in 1991. There were three primary reasons that California bank earnings did not keep pace with the recovery in bank earnings nationally. First, while net interest margins improved at California banks, they did not increase nearly as much as they did nationally. Second, California banks have yet to experience the same degree of asset quality improvement as have banks. In California, the problem loan ratio appeared to peak in the u.s. Western Banking is a quarterly review of banking developments in the Twelfth Federal Reserve District. It is published in the Weekly Letter on the fourth Friday of January, April, July, and October. FRBSF first quarter of 1992, a year later than nationally, and from year,end 1991 to year,end 1992 fell from 6.96 to only 6.71 percent. Moreover, despite the improvement in total loans, the ratios for problem construction loans and single family mortgages continued to climb through year-end 1992. Finally, California banks' assets contracted by 6.6 percent in 1992 as the result of a 10.5 per, cent decline in total loans, while banks nation, ally generated earnings by expanding their assets by 2.1 percent. losses at small banks u.s. Figures for the show that earnings were strong for banks of all sizes in 1992. For example, banks with assets below $1 billion had an excellent year, as ROA climbed above 1.00 percent. In California, however, quite a different pattern emerged, as 90 percent of 1992 bank earnings were concentrated in a few of the state's largest banks. Indeed, as a group, California's larger banks (over $1 billion in assets) posted a sharp increase in earnings, with ROA up to a favorable 0.71 percent for 1992, about twice its 1991 ratio (see Figure): Figure 1: Return on Assets (Year-ta-date) Percent 1.6 " Large Calif. banks " ~over $1 billion in assets) "- 1.4 1.2 ...................>..>.;:-- . . . U.S. without Calif. ./ -- - . 0.4 ..........\-........ \ ..-.... \ .....( ..- -J / './ '. './ ,---,------,-----,,--,---r--'---r-,...--,----,-.---'-,--+ 00 01 00 02 00 03 00 04 ~ 01 ~ 02 ~ 03 ~ 04 ~ 01 ~ 02 ~ 03 0.6 0.2 Small Calif. banks (under $1 billion in assets)'- One way to examine the effects of local business conditions on banks is to look at the performance of community banks (assets of under $300 million) across the state. This analysis clearly highlights the problems of community banks in the six metropolitan counties in the hard-hit Southern California region. The 215 banks in that area, with combined assets of $19 billion, 6 percent of the state's total, suffered a huge loss in the fourth quarter of 1992. For the year they posted a net loss of $82 million, for an ROA of -0.42 percent. Also, problem real estate loan ratios for community banks in Southern California remained well above the ratios for their peers located elsewhere in the state. Other parts of the state, including the San Francisco Bay Area, have experienced job losses, but less so than SOLithern California. The 71 community banks in the Bay Area of Northern California reported virtually no earnings for the entire second half of 1992, but were able to post a 0.32 percent ROA for the entire year. Outside of the two major metropolitan centers, the state's other 89 community banks continued to report relatively low ratios of problem loans and strong earnings, a pattern that is generally consistent with economic conditions in these areas. 1.0 0.8 \ ....... Earnings problems arising from relatively high ratios of problem loans and net chargeoffs of problem assets took a significant toll on California banks in 1992. Small banks in particular have been hard-hit because they find it harder to diversify their lending activity outside of their local market area and because of their heavy concen, tration in real estate lending (63 percent of loans at these banks) at a time when some local real estate markets have been hurt by th~ state's weakened economy. 0.0 ~ 04 Light at the end of the tunnel? Earnings problems arising from high ratios of problem loans and net chargeoffs of problem assets took a significant toll on California banks in 1992, especially small banks in Southern California. California banks' problem loan ratios still remain relatively high compared to the national figures; however, these banks bolstered their financial position by adding $4 billion in equity capital in 1992, and their loan loss reserve ratio also remains well above the average. But, perhaps the best news for California banks was the overall improvement in asset quality in the fourth quarter and the tentative signs of improvement in the 1993 employment data. Taken together, these signs may mean that some relief is in store for the California banking industry. u.s. But banks in California with under $1 billion in assets reported an ROA of only 0.09 percent for 1992. The state's smallest banks, with assets under $100 million, suffered a net loss for the year. Unlike their larger statewide branch bank competitors, many of these banks are dependent on smaller local banking markets that are more likely to be susceptible to adverse local economic conditions. Gary C. Zimmerman Economist REGIONAL BANK DATA DECEMBER 31, 181Z (NOT SEASONALLY ADJUSTED. PRELIMINARY DATA) DiSTRICT •••• _ . _ ._ _ LOANS SECURITIES ALASKA • • ____ u . u ••• CALIF. ARIZ. _ _ • __________ u HAWAII • • •___• •_ _ _ _ _ _ _• • • • • •_ IDAHO NEVADA OREGON • • • •_____. . . . ._ _ _• • • • •_____ • _ • • • • • • •_ ••• UTAH WASH. _ _. . . . . . . . . . . . . ____• • • • • • • FOREIGN (RESIDUAL) DOMESTIC 24.591 413.629 0 4.139 0 36,265 22,300 301.025 2.184 20,250 0 10.061 0 14,391 0 25,825 89 14,214 31 40.193 TOTAL FOREIGN (RESIDUAL) DOMESTIC REAL ESTATE COMMERCIAL CONSUMER AGRICULTURE INTERNAnONAL 334.926 21.119 2.152 5 2.141 948 123 345 4 0 20.096 0 20.098 1,106 2.854 8.111 348 8 226.901 28,241 202.eB6 119.183 40.194 28.922 3.029 113 13,891 1,431 12.453 1,211 3,265 1.128 50 0 6.139 0 8.139 2.110 1,480 1.982 183 0 1,886 0 1,886 2,513 820 4,318 14 0 11,394 0 11,394 1,218 4,481 3.503 413 0 8,402 0 8,402 3,351 1,581 2.152 158 0 29,418 31 29,439 12.945 1.588 8.882 990 0 TOTAL U.S.T.S. SECONDARY MARKET OTHER SEC. 89.629 22.811 35,521 11,432 1.990 881 31,401 11,292 20.891 5.412 4,433 2.183 1.113 1,801 410 801 532 8,220 2.695 4.899 826 531 5B4 3.559 1,886 1.553 418 4.811 1,398 2,318 8117 3,289 114 1.102 812 4,328 1.512 1,459 1.354 301,201 182.649 82.155 55.106 5.188 121 511 UABIUnES TOTAL DOMESTIC 451,282 432.891 4.135 4.135 32.941 32.941 303,321 281.022 20.831 18.641 9,321 9,321 12.883 12.883 23.521 23.521 13.092 13.023 31,244 31,201 DEPOSITS TOTAL FOREIGN (RESIDUAL) DOMESTIC DEMAND TIME AND SAVINGS NOW MMDA SAVINGS SMALL TIME LARGE TIME 403,051 24,206 318.846 95,431 283.414 42.935 94.148 44.024 68.688 32,232 3.804 0 3,603 2.529 335 555 888 480 453 29.188 0 29.168 8.148 23.620 3.531 1,345 3,381 1.888 1,489 210.838 22.183 248.655 68,359 182,298 25.103 88.191 28.121 40,230 23,232 15,342 1.915 13.421 2.548 10.819 1.831 1.959 3.068 2.013 2.149 1.985 0 1.985 1.580 6,385 1.046 1,511 924 2,310 593 10.103 0 10.103 2.815 1,489 1,325 2,413 1.131 1.069 B42 20.512 0 20.512 4,224 18,348 3,216 4,298 2.195 5.834 941 10.898 89 10.821 2,338 8,291 1,516 1.181 1,584 2.158 864 34.181 31 34.124 8.541 25,511 4.559 8.020 3.758 1.285 1,879 OTHER BORROWINGS EQUITY CAPITAL LOAN LOSS RESERVE 32,249 40,931 10.138 498 604 40 2,590 3,311 543 14.112 28.004 1,555 4.946 1.603 230 1,229 107 1.150 1,534 362 2,380 2,304 452 2.135 1,251 195 2.011 3.588 655 LOAN COMMITIMENTS LOANS SOLD 191,491 632 29 29.805 248 121.916 19.685 6,490 131 2,381 33 1.189 90 10,186 20,853 6.538 138 11,989 219 36.035 2.192 344 23 2,204 205 23,831 1.882 1.511 45 755 58 1,313 1.923 181 1,131 58 83 2.883 251 39,298 13.713 8,888 4,603 12.114 310 111 93 16 2.823 939 834 228 823 28.829 9.104 6.063 3,583 8,090 1.405 112 324 81 286 691 319 128 209 1,429 216 183 253 111 2.008 121 !l3O 145 612 1.093 441 211 88 313 2.909 1.090 114 193 912 6,581 2.868 3,891 109 33 181 85 115 3,510 1.615 1.946 313 138 241 185 594 205 123 389 523 195 310 311 104 213 729 65 17 0.18 9.50 0,33 0.58 1,48 4Al 1.13 15,43 3.98 1,24 18.88 4.42 2.92 25,38 8.25 1.20 4.65 1,51 11.06 4.94 1.11 13.18 4.45 1.65 1.59 0,33 0.08 4.60 3,38 0.51 0.83 2,32 0,55 0,31 0.52 1.81 0.63 2.22 0.54 0.13 0.51 1.18 0.22 2.14 2.86 4.13 5.98 19.05 3.19 3.55 0.88 INTEREST FEES & CHARGES EXPENSES TOTAL INTEREST SALARIES LOAN LOSS PROVISION OTHER INCOME BEFORE TAXES TAXES NET INCOME 1,015 89 ROA(%) ROE(%) NET INTEREST MARGIN (%) 4A1 1.81 12.81 4.91 3.61 LOAN LOSS RESERVE (ALL BANKS) NET CHARGEOFFS, TOTAL REAL ESTATE COMMERCiAL CONSUMER AGRICULTURE 3.03 1,33 1.05 1,21 3.06 0,26 1.84 0.79 0.90 0.89 0.55 0.00 2.10 1,35 1.12 2.15 1.90 1.51 5.88 1.55 4.12 8.81 18,43 11.82 4.21 2.34 2.00 2.09 1.18 0.00 0,53 1.41 2.01 2.98 2.31 0.00 149 248.868 8 2.830 38 19.881 PAST DUE & NON·ACCRUAI., TOTAL REAL ESTATE CONSTRUCTION COMMERCIAL FARM 1-4 FAMILY REV 1-4 FAMILY OTHER MULTI·FAMILY COMMERCIAL CONSUMER AGRICULTURE NUMBER OF BANKS NUMBER OF EMPLOYEES 21Z! 8.10 1.29 1.11 3.08 6.38 5.12 3A9 3A8 25A1 0.93 2.89 9.08 9.90 3.18 8.24 3,30 1,52 1,29 1.30 3.98 0.01 8.11 8.54 23.14 9.41 1.31 1.19 OAO 0.11 0.85 0.99 1.13 3.12 3Z! 1.21 6.08 4.08 3.72 8.18 0.88 10.&5 1.25 3.99 2.91 3.88 2.54 15.18 452 180,481 11 8,488 3Al 135 37 221 13AS 0.53 0.36 5A1 0,28 2.60 0.85 0.49 1.15 1.45 0.18 2.09 2.81 9.85 2.97 3.83 1,58 0.33 1.84 1.81 2.54 1,23 8.10 18.30 8.15 0.00 0.88 3.53 9.38 14.11 5.85 5.85 3.15 3.11 10,22 4,58 5,52 NlA NlA 1.13 3.11 1.90 5.19 20 4.123 18 6,076 16,190 OA9 OZ! 48 3A9 3.55 10.06 0,80 1.41 OA9 242 412 lA2 2,58 1,33 2.94 3.83 5.08 1.91 5.64 64 1.152 94 21.258 Opinions expressed in this newsletter do not necessarily reflect the views of the management of the Federal Reserve Bank of San Francisco, or of the Board of Governors of the Federal Reserve System. Editorial comments may be addressed to the editor or to the author.... Free copies of Federal Reserve publications can be obtained from the Public Information Department, Federal Reserve Bank of San Francisco, P.O. Box 7702, San Francisco 94120. Phone (415) 974-2246, Fax (415) 974-3341. ~ 'f" ~S~U! tr\ ueaqAos 41!M l(!)' Jaded papAoaJ uo P81UiJd OUt:'6 \') 'OJSPUl?J:I Ul?S WLL O)SPUOJ~ JO '1!1~::> 'O:>S!:>U~J:I u~S 'O'd UOS ~U08 al\JaSa~ IOJapa~ C:!iL 'ON llW~Bd OIVd ~9V ISOd X09 's'n llVW ~'lVM )llnil ~uaw~Jodaa 4)JOa5a8 DEPOSITORY INSflTU110NS REQUIRED TO HOLD RESERVES WITH THE FEDERAL RESERVE ON A WEEKLY BASIS PERCENT OF COMBINED MARI<ET TOTAL FOR FEBRUARY 1993. BY REGION DlsmlCT ~ ARIZONA ~ HAWAII IDAHO NEVADA ~ ~ ~ DEPOSIT TYPE CB SL CU CB SL CU CB SL CU CB SL CU CB SL CU CB SL CU CB SL CU CB SL CU r.B SL CU CB SL CU TOTAL DEPOSITS DEMAND NOW SAVlNGS & MMDAS SMALL flME LARGEflME 54 39 6 70 5 84 28 5 8 59 eo 31 32 66 9 55 3 75 48 98 58 56 Zl 44 48 10 95 66 29 89 3 ffT 31 eo 34 52 46 73 22 3 rn 3 0 78 18 8 80 15 5 43 54 3 82 38 0 81 10 9 94 1 5 84 8 8 77 10 13 77 17 6 76 12 13 8 15 3 6 82 3 15 70 6 24 n 15 7 70 10 19 S1 34 9 90 6 3 66 Zl 11 S1 26 17 40 58 4 44 54 2 90 98 4 26 0 1 8 36 4 41 9 18 2 3 92 96 89 7 4 10 90 9 95 4 00 6 46 6 5 7 37 7 74 3 39 51 10 6 38 5 8 3 7 2 91 96 00 92 88 89 6 5 0 3 4 10 8 4 5 4 4 1 '5 CB • COMMERCIAL BANKS, SL • SAVlNGS & LOANS AND SAVING BANKS' CU. CREDIT UNIONS, 73 Zl 77 90 MAY NOT SUM TO 100% DUE TO ROUNDING TYPE OF ACCOUNT OR LOAN DATE SAVINGS ACCOUNTS AND MMDAS DEC92 JAN93 FEB93 2,88 2,85 2,8 3,05 3,01 2.96 2,72 2,68 2,67 2,77 2,73 2,7 3.36 3.23 3,09 3,51 3.47 3,38 2,88 2,B6 2.79 3,23 3,2 3,21 3,25 3,25 3.16 92 TO 182 DAYS CERTIFICATES DEC92 JAN93 FEB93 3,16 3,13 3,08 3.15 3.08 3,01 2,88 2,87 2,83 2,9 2.86 2,88 3,05 2.67 2,5 3,24 3,22 3.19 3,08 3.08 3.06 3,28 3,27 3.23 3,49 3.47 3,38 2-1/2 YEARS AND OVER CERnFICATES DEC92 JAN93 FEB93 4.77 4.72 4,59 4,55 4,52 4,41 4,11 4,09 4,06 3,98 4,04 4,01 4,61 4,28 4.03 5,13 5.13 5.2 5,05 5,05 5.05 4,68 4,68 4,56 4,62 4.62 4.61 4,92 5.96 70 8.69 5.71 84 8.99 6.07 21 6.85 101 N/A N/A N/A N/A 8 N/A N/A N/A 7.51 N/A 6.25 305 9,25 35 6,81 N/A 4.87 57 8,81 27 8.72 30 5,93 N/A N/A N/A 7.03 N/A 9.02 13.87 18.8 N/A N/A N/A 10 10,5 N/A 8.78 11.34 19.25 8.9 11.5 14.9 8.51 11.68 18,3 COMMERCIAL. SHORT TERM" COMMERCIAl. LONG-TERM" LOANS TO FARMERS" CONSUMER. AUTOMOBILE CONSUMER. PERSONAL CONSUMER. CREDIT CARDS AVE, AVE, AVE, AVE. AVE. AVE. RATE MAT, (DAYS) RATE MAT, (MONTHS) RATE MAT, (MONTHS) AVE, RATE AVE, RATE AVE. RATE US DISTRICT ARIZ 58 6.39 44 7,62 14 6.33 22 6.79 N/A N/A N/A 6.76 N/A 8,57 13.57 17.26 8,98 12,67 17.76 8.9 15 14,9 29 CAUF 29 HAWAII IDAHO OREGON UTAH SOURCES, SURVEY OF TERMS OF BANK LENDING AND TERMS OF CONSUMER CREDIT; MOST COMMON INTEREST RATES ON SELECTED ACCOUNTS. " DATA ARE COMPOUNDED ANNUAL RATES. WASH
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