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FABSF WEEKLY LETTER Number 92-17, April 24, 1992 California Banks' Problems Continue in 1991 banks in the Twelfth District produced mixed results. In most states, the banking industry finished 1991 with a strong fourth quarter, reporting robust earnings for the year and little deterioration in asset quality. However, in California, where problem loans have been rising for over a year, the story was different. California banks finished the year with a huge loss in the fourth quarter, their second consecutive quarterly loss. As a result, California banks, with assets of $352.4 billion, earned only $651 million for the entire year. While industry performance in California was dismal, there were important signs of improvement in the national earnings picture. For exampie, banking industry earnings for 1991 were $18.6 billion, up 15.1 percent from 1990. And return on assets (ROA) for 1991, at 0.56 percent, is an improvement over the 0.49 percent recorded for both 1989 and 1990. There also was continued improvement in problem loan ratios in the fourth quarter, a hopeful indication that at least nationally, asset quality appears to be stabilizing. The encouraging news on U.s. bank earnings is tempered somewhat by the composition of earnings. Almost $3 billion of the 1991 earnings arose from gains from the sale of securities, as banks took advantage of the declines in interest rates over the year to generate gains by selling holdings of investment securities. Despite a boost to earnings from slightly wider net interest margins, the difference between the average cost of funds and the average return on loans and securities, net operating earnings from banking operations actually declined by over 1 percent from the year earlier. quarter for the. othei seven states vv'as at or near 1 percent, a strong figure; combined with healthy earnings in the first three quarters of 1991, it resulted in ROAs of greater than 1 percent for 1991 for banks in Alaska, Nevada, Washington, Hawaii, and Idaho, while banks in Oregon and Utah were not far behind, reporting ROAs of better than 0.80 percent for the year. Outside of California, some Twelfth District states report increases in problem loan ratios, but they generally remain well below those in either Cali.fornia or the nation. Although banks in Arizona still face relatively high ratios of problem real estate and business loans, they recorded moderate earnings for 1991 California: problems worsen California banking industry earnings plummeted in the fourth quarter of 1991 as problem real estate assets grew worse and loan loss provisions soared. For the fourth quarter, California banks posted a $384 million loss, compared to earnings of $461 million in the same quarter of 1990, a relatively weak number to begin with. The sharp deterioration in bank earnings over the past year reflects the dramatic increase in problem loans and the building of loan loss reserves. California banks incurred $2.2 billion in expenses for loan loss provisions in the fourth quarter alone, about $1 billion more than average provisions in the first three quarters. Strong showing outside of California and Arizona Despite losses of $75 and $384 million in the third and fourth quarters, respectively, California banks still managed to generate earnings of $651 million for 1991 (ROA of 0.19 percent). However, 1991 earnings in California paled when compared either to industry performance nationwide or to California bank earnings of $3.3 billion in 1990 (ROA of 0.98 percent). Bank performance generally remained robust among the nine states in the Twelfth District except California and Arizona. ROA for the fourth The depth of the problems facing California's banking industry is apparent from Chart 1, which WESTERn BAnKinG Western Banking is a quarterly review of banking developments in the Twelfth Federal Reserve District. It is publ ished in the Weekly Letter on the fourth Friday of January, April, July, and October. rose relative to the problem loan ratios for the rest of the Twelfth District (5.21 percent) and the nation (8.12 percent). The ratio for California banks still was below the national average due to the better performance of residential mortgage loans in California. FRBSF shows that the losses hit the entire spectrum of banks, from the largest multinationals and regionals to the smallest community banks. Fully 25 percent of California banks reported losses for the year, up from only 12 percent in 1990. Nationally only 10.8 percent of U.S. banks recorded losses for the year. Chart 1 Return on Assets: California Banks by Size Quarter-by-Quarter Percent 2.0 1.0 '-90-:0:-1'-90"'""'::0""'"2~90--:::0-'3-90-:0~4 -91-:01-'-9-1:-02 9-1:-03...... -1 4 -1.0 ..... 9 :0.....J • Large Banks I!iJ Medium-Sized Banks 0 Small Banks Moreover, when analyzed by peer groups, each reported a loss in the fourth quarter. In the District states outside of California this pattern across peer groups does not occur. The current pattern also contrasts with the last period of significant losses, which was 1987, when losses were mostly confined to large banks with loans to less de~ veloped countries. Difficulties in commercial real estate markets, characterized by high vacancy rates and falling rents, are exerting a strong negative impact on the state's banking industry. In 1991 problem construction loan ratios and pioblem.commercia! real estate loan ratios stabilized nationally, while in California these ratios increased by 6.09 and 1.59 percentage points, respectively. At the end of the fourth quarter of 1991, problem construcand tion loan ratios (18.60 percent for the 20.29 percent for California) and commercial real estate loans (8.60 percent for the nation versus 8.84 percent for California) exceeded the ratios. As a group the largest banks in the state have even higher ratios. u.s. u.s. Despite the increases, the ratios of problem construction and commercial real estate loans for California banks are not as bad as some other areas (see Chart 2). In particular, California's ratios stiii remain below those for New England (23.20 and 12.34 percent, respectively); the New England figures ir:nproved noticeably following the FDIC's resolution of Bank of New England. Chart 2 Problem Real Estate Loan Ratios by Region (Past Dua 30-89 days and Nonaccrual, December 31, 1991) Percent 35.0 30.0 25.0 In California, problem or delinquent loan ratios (reported here as loans 30 days or more past due plus nonaccrual loans divided by all loans of that category) generally rose in the fourth quarter, although not as rapidly as they did in the previous four quarters. Problem loan ratios in California now are near or above the ratios for the nation. For example, for California banks with more than $100 million in assets, the total problem loan ratio for the fourth quarter of 1991 (6.96 percent) is now above the ratio for the U.S. (6.13 percent), and the ratio has increased by more than 2 percentage points since year-end 1989. In contrast to the growing problems in California, problem loan ratios for all other states in the District (except Nevada at 5.53 percent) are at or below 5 percent. Real estate woes continue Reflecting the continued weakness in real estate markets, especially in commercial real estate, the fourth quarter 1991 problem real estate loan ratio for California increased from 7.56 in the third quarter to 7.82 percent in the fourth quarter, and 20.0 15.0 10.0 5.0 Other Twelfth District Construction • Commercial o New England New York 0.0 Iiil Single Family, excluding home equity On the horizon It has often taken the banking industry several quarters to adjust to increased levels of problem loans. For example, following the recession that ended in 1982, problem loan ratios nationally stayed at abnormally high levels for almost two years. Thus, even if California banks' quality problems were to stabilize at present levels, banks will likely face a challenge over the next year or more as they work to resolve their problem loans. Gary C. Zimmerman Economist REGIONAL BANK DATA DECEMBER 31, 1991 (NOT SEASONAllY ADJUSTED, PRELIMINARY DATA) DiSTRICT ALASKA ~ ARiZONA CALI F. HAWAii !DAHO _. -_ ...... - .. _.---- -_._---. .. -.--.-- -- .. --.- ASSETS AND liABILITIES -- $ MilLION NEVADA OREGON UTAH WASH. (All .COMMERCIAl BANKS) ASSETS TOTAL FOREIGN DOMESTIC 517,590 34,301 483,288 4,611 0 4,611 35,596 NIA 35,596 35Z,414 32,400 320,014 20,766 1,745 19,021 9,760 NIA 9,760 15,214 NIA 15,214 25,741 3 25,739 13,849 84 13,765 39,639 70 39,569 lOANS TOTAL FOREIGN 2,041 5 2,036 877 688 309 5 NIA 23,230 NIA 23,230 7,288 2,984 5,520 393 8 255,645 29,234 226,411 127,460 49,823 31,940 3,016 120 13,209 1,416 11,793 6,671 3,099 1,233 24 0 6,589 NIA 6,589 2,035 1,510 1,769 761 NIA 10,752 NIA 10,752 2,603 1,109 6,303 16 NIA 17,193 NIA 17,193 6,633 4,808 3,571 496 NIA 8,655 NIA 8,655 REAL ESTATE COMMERCiAL CONSUMER AGR I CUlTURE iNTERNATIONAL 366,929 30,719 336,211 169,615 73,276 60,151 5,957 127 1,755 3,058 162 NIA 29,614 63 29,551 12,856 7,500 6,447 1,084 0 TOTAL U.S. T.S. SECONDARY MARKET OTHER SEC. 54,150 17,121 25,000 12,029 1,915 931 512 473 5,040 1,609 2,319 1,112 29,266 9,036 14,467 5,763 4,155 1,694 1,683 778 1,868 1t07 973 488 1,977 831 622 524 3,635 1,020 1,688 927 2,788 437 1,587 765 3,505 1,158 1,148 1,200 LIABilITIES TOTAL DOMESTIC 483,061 448,760 4,055 4,055 32,845 32,845 330,538 298,139 19,342 17,597 9,091 9,091 14,139 14,139 23,666 23,663 12,723 12,639 36,662 36,592 DEPOSITS 417,729 32,974 384,755 86,694 298,061 39,633 86,202 38,654 85,613 47,570 3,534 0 3,534 985 2,549 300 523 547 611 537 30,353 NIA 30,353 5,167 25,186 3,099 6,718 2,449 10,912 1,996 286,743 31,121 255,621 61,392 194,229 24,848 60,597 25,268 48,554 34,760 16,190 1,554 14,636 2,439 12,197 1,470 2,127 2,339 2,290 3,970 7,618 NIA 7,618 1,277 6,342 951 1,315 635 2,805 635 9,086 NIA 9,086 2,171 6,915 1,106 2,236 1,403 1,242 925 20,272 NIA 20,272 3,789 16,483 2,752 3,968 1,689 6,753 1,318 10,497 84 10,414 1,994 8,420 1,330 1,812 1,069 3,387 812 33,435 214 33,221 7,480 25,741 OTHER BORROWiNGS EQUITY CAPITAL lOAN· lOSS RESERVE 44,320 34,529 10,419 480 556 40 2,047 2,751 560 26,732 21,875 8,074 2.551 1;424 204 1,366 669 93 4,241 1,074 321 2,794 2,075 413 2,017 1,126 205 2,093 2,977 509 lOAN COMMITMENTS lOANS SOLD 198,548 30,420 555 11 18,577 266 138,081 29,212 5,939 275 2,257 32 1,752 118 9,622 279 6,132 67 15,633 160 lOAN LOSS RESERVE (ALL BANKS) NET CHARGEOFFS, TOTAL REAL ESTATE COMMERCIAL CONSUMER AGR I CUlTURE 2.84 1.38 0.70 1.73 2.70 0.29 1.98 0.17 0.13 0.09 0.55 NIA 2.41 1.48 2.15 2.30 1.84 2.74 3.16 1.52 0.74 1.90 3.29 0.05 1.54 0.13 0.03 0.10 0.74 1.37 1.41 0.43 0.05 0.96 0.69 -0.06 2.99 2.94 0.38 4.72 3.86 -0.08 2.40 1.03 0.59 1.68 1.38 0.05 2.37 1.49 0.56 2.53 2.37 0.18 1.72 0.54 0.22 0.54 1.18 0.34 PAST DUE & NON-ACCRUAL, TOTAL REAL ESTATE COMMERCiAL CONSUMER AGR I CULTURE 6.08 7.16 7.10 3.61 5.05 4.53 4.55 5.26 3.03 NIA 4.97 9.13 11.09 2.64 8.32 6.96 7.82 7.83 4.14 5.41 1.70 1.65 1.87 2.04 1.17 2.13 2.64 2.65 1.77 1.42 5.53 4.41 12.38 5.39 0.36 4.66 6.00 4.39 1.67 5.88 4.62 6.43 5.24 2.94 3.65 3.85 4.88 4.08 2.08 4.94 DOMESTIC SECURITIES TOTAL FOREIGN DOMESTIC DEMAND TIME AND SAVINGS NOW MMDA SAViNGS SMAll TIME LARGE TIME EARNINGS AND RETURNS--$ MILLION, YEAR-TO-DATE .,. 4n., ~, 17" 3,m 6,907 3,255 9,058 2,619 (ALL COMMERCIAL BANKS) INCOME TOTAL INTEREST FEES & CHARGES 54,342 44,724 2,728 448 381 22 3,480 2,772 191 37,010 30,579 1,846 1,880 1,684 39 954 836 53 2,161 1,614 64 2,696 2,187 170 1,468 1,238 75 4,244 3,435 267 EXPENSES TOTAL INTEREST SALARIES lOAN LOSS PROVISION OTHER 50,645 22,717 9,064 7,195 11,669 349 166 90 8 85 3,382 1,559 652 257 914 35,550 15,708 6,246 5,777 7,818 1,523 913 295 44 271 798 449 127 33 189 1,857 555 215 399 687 2,398 1,071 497 315 516 1,289 618 194 139 338 3,499 1,678 747 223 851 3,629 1,479 2,146 99 28 71 98 36 62 1,394 736 651 357 131 226 156 55 101 304 99 206 297 91 206 180 54 126 745 248 497 0.42 6.21 4.29 1.55 12.70 4.73 0.18 2.24 3.45 0.19 2.98 4.23 1.12 15.88 3.83 1.05 15.13 4.02 1.50 19.14 7.74 0.81 9.93 4.39 ·0.93 11.16 4.59 1.27 16.71 4.48 782 240,189 8 2,559 39 18,828 475 153,563 20 8,356 22 4,991 19 6,420 51 15,978 55 7,049 93 22,445 INCOME BEFORE TAXES TAXES NET INCOME ROA (%) ROE (%) NET iNTEREST MARGiN (%) NUMBER OF BANKS NUMBER OF EMPLOYEES 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. > Printed on recycled paper with soybean inks. @~ 0<: l176 YJ 'OJSPUl?JJ Ul?S <:oa xog 'O'd O)S!)UOJ:J uOS dO ~uo8 IOJepa:J eAJeSe~ ~uaw~Jodaa lI)Joasa~ DEPOSITORY INSTITUTIONS REQUIRED TO HOLD RESERVES WITH THE FEDERAL RESERVE ON A WEEKLY BASIS (PERCENT OF COMBINED MARKET TOTAL FOR FEBRUARY 1992, BY REGION) DISTRICT ALASKA CALIF ARIZONA DEPOSIT TYPE CB SL cu CB SL CU CB SL CU TOTAL DEPOSITS DEMAND 54 41 91 4 65 28 6032 3363 4846 5 71 5 7 99 0 1 93 95 90 90 95 94 NOW SAVI NGS & MMDAS SMALL TIME LARGE TIME CB = COMMERCIAL 59 55 75 94 8 3 5 BANKS; SL 424 6 35 4 41 8 17 2 3 = SAVINGS 1 7 0 5 0 10 0 10 1 4 1 6 HAWAII CB SL CU CB SL CU 4748 90 5 59 35 5638 25 73 43 51 68 28 5 89 3 7 5 6 6 6 6928 63 29 44 52 82 16 3 6 & LOANS AND SAVINGS BANKS; CU 3 7 4 2 IDAHO CB SL CU 91 5 93 0 94 3 94 3 89 10 89 6 = CREDIT 3 7 3 3 2 4 NEVADA CB SL CU 72 25 3 99 1 0 7816 6 82 14 4 41 56 3 62 38 0 OREGON CB SL 81 94 84 78 76 83 cu 8 1 5 11 8 10 18 10 UTAH 8 12 6 7 WASH CB SL CU 78 88 84 72 CB SL CU 8 13 5636 90 7 64 24 58 25 41 55 50 49 3 9 4 13 622 15 8 83 10 7 n 9 4 11 17 4 2 UNIONS; MAY NOT SUM TO 100% DUE TO ROUNDING TYPE •_____________ ---- -_ .. -_ .... oo- ___ .. ______ .. __ .. _.............. __ ....... _________ ARIZ ________ .. ______ .. ___ .. __ .. ________________ .. __ .. __ __ .. ___.__ DISTRICT CALIF HAWAII IDAHO OREGON DATE US UTAH WASH _____ OF ACCOUNT OR LOAN .... _.. ~ SAVINGS ACCOUNTS AND MMDAS"" DEC91 JAN92 FEB92 4.30 3.93 3.78 4.32 3.93 3.81 3.87 3.57 3.55 4.31 3.82 3.76 4.63 4.41 3.99 4.20 4.13 4.16 3.98 3.64 3.55 4.67 4.08 4.D2 4.48 3.84 3.72 92 TO 182 DAYS CERTIFICATES DEC91 JAN92 FEB92 4.42 4.07 4.00 4.31 3.91 3.85 3.93 3.62 3.66 4.26 3.89 3.86 4.50 4.03 4.05 4.06 3.70 3.70 4.20 3.73 3.70 4.48 4.16 4.12 4.52 4.21 3.88 2·1/2 YEARS AND OVER CERTIFICATES DEC91 JAN92 FEB92 5.55 5.30 5.37 5.37 4.96 5.03 4.76 4.47 4.74 5.17 4.86 4.87 5.66 5.12 5.29 5.67 5.39 5.44 5.39 4.99 5.09 5.47 5.28 5.33 5.36 4.93 4.80 5.54 53 6.38 41 8.06 14 9.89 14.39 18.09 6.64 129 7.95 40 6.81 6 9.90 13.64 18.51 7.41 63 N/A N/A 7.21 N/A 11.00 14.00 18.00 6.41 155 7.84 34 6.84 7 10.11 13.18 18.98 6.46 92 9.75 50 N/A N/A N/A N/A N/A N/A N/A N/A N/A 7.91 N/A 10.50 11.00 N/A 7.01 15 N/A N/A 5.97 3 8.92 13.47 19.25 5.61 50 9.44 44 8.75 11 9.94 15.00 21.00 7.06 215 7.12 35 7.76 10 9.16 13.16 17.93 COMMERCIAL, SHORT· TERM· COMMERCIAL, LONG· TERM" LOANS TO FARMERS· CONSUMER, AUTOMOB I LE CONSUMER, PERSONAL CONSUMER, CREDIT CARDS AVE. AVE. AVE. AVE. AVE. AVE. AVE. AVE. AVE. RATE MAT. (DAYS) RATE MAT. (MONTHS) RATE MAT. (MONTHS) RATE RATE RATE -- -_ --_.- -_ -_ ------ -_ ----------.... -- - --_ ------ --_ -_ --- -_ -- -_ --- -- --_ --- --- --_ --- .. .. .. .. -- ... -. -- ------ - ........ .. .. .. _.. .. .. .. ....... --- .-SOURCES: SURVEY OF TERMS OF BANK LENDING AND TERMS OF CONSUMER CREDIT; MOST COMMON INTEREST RATES ON SELECTED ACCOUNTS. " DATA ARE COMPOUNDED ANNUAL RATES ••" SAVINGS AND MMDAS COMBINED AS OF OCTOBER 1991. -----
