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FRBSFWEEKLY lETTEA Number 95-04, January 27, 1995 Economy Boosts Western Banking in '94 Banks in the West turned in a strong performance in 1994. In the Twelfth Federal Reserve District, banks registered record profits, improved their asset quality, and maintained the strong capital positions built up over the past few years. The performance of banking mirrored the robust economic expansion in most of the region. The long-awaited turnaround in the California economy also contributed to improved banking conditions and a pickup in loan growth; though it was not enough to keep many community banks in the state from weak performances. The sharp rise in interest rate spawned by the strong national economy in 1994 had only a small negative effect on reported bank earnings in the . District. This Letter examines the performance of the banking industry in the Twelfth District in 1994, focusing on the effects of the growth in the economy and the rise in interest rates. though the prolonged recession and slower recovery in the state kept aggregate bank ROAjust below a 1 percent annual rate. The drag on bank performance in California was apparent mainly at smaller banks. For example, as a group the three largest banks in the state posted earnings rates well above the national average. In contrast, community banks (institutions with assets under $300 million) in California reported an annualized ROA of only 0.36 percent through the third quarter of 1994. Community banks operating in Southern California, . the area hit hardest during the recession, fared worse: As a group, they barely broke even in the first three quarters of 1994. Overall, nearly 20 percent of the banks in California lost money in the first three quarters of 1994. That is well . above the national figure of 4 percent in 1994 and is indicative of the lingering effects of the nearly three years of recession in the state. Asset quality plays a key role Record earnings Profits among Twelfth District banks through the third quarter of 1994 were $4.6 billion, up from $3.9 billion over the comparable period in 1993. Annualized, the earnings in 1994 represent an aggregate return on assets (ROA) of 1.19 percent. That was a record rate for the District and marked last year as the first since 1990 that District bank performance at least matched the national average. Within the District, the strength of bank performance was correlated with economic conditions. In some of the faster growing states, like Idaho, Nevada, and Oregon, for example, aggregate banks ROAs were well above the national average in 1994. Likewise in California, the recovery in the state's economy helped boost bank performance during the first three quarters of 1994, WESTERn BAnKinG The biggest boostto banking in the District from the economy was through the improvement in asset quality. The economy has strengthened the financial position of borrowers and has helped stabilize the value of collateral backing bank loans. As a result problem loans as a percent of total loans have been coming down in the District. Outside of California, overall loan quality generally is quite good, with total problem loan ratios below the comparable u.s. ratios. In California, asset quality also has improved across the board. However, problem loan ratios for lending related to real estate remain above the national averages and continue to be a drag on bank performance, particularly for community banks in Southern California that have a high dependency on real estate loans. 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 The impactfrom the overall improvement in asset quality on the bottom line for banks was a sizable reduction in expenses for contributions to loan losses reserves. In the first three quarters of 1994, expenses for loan losses for District banks were about $1 billion less than in the comparable period in 1993. Western banks also reduced their holdings of real estate obtained through defaults on loans, as they "cleaned up"their balance sheets by selling off those nonearning assets. 800st from growth in credit services Bank performance in the District got another boost from improved credit conditions through the growth in bank credit services. Total loans in the District rose by close to 6% percent from September 1993 to September 1994, following a contraction of over 3Yz percent during the previous 12 months. The increase in lending was met in part by banks' drawing down their sizable reservoir of liquid assets. The pickup in lending helped bank earnings in the District, in part because loans tend to have higher yields than securities of comparable maturity. The impact of the economy on credit services also was evident in the off-balance sheet activity at District banks in 1994. Over the 12 months ending September 1994, for example, loan commitments in the District were up 18 percent, a much faster rate than for total loans. Letters of credit, which banks sell to customers looking to enhance the credit quality of commercial paper and other types of borrowing, rose by about 13 percent. These off-balance sheet activities add to earnings through the points and other fees banks charge their customers. Little impact from the rise in interest rates The strong economy nationally pushed up shortand long-term interest rates in 1994. While the jumps in rates were sizable-250 basis points on 3-month Treasury bills and 200basis points on 10year Treasuries-they had little net effect on the aggregate performance of banking in the District during .1994. One reason is that the rise in the average yield on bank assets kept pace with the increase in the cost of bank funding. In the District, net interest margins, which have been relatively high in recent years, narrowed only slightly, and then mainly at the region's larger banks. Smaller banks as a group actually reported wider margins in the other western states, other than Hawaii. Another reason is that realized and unrealized losses on securities were limited. Changes in interest rates can affect the market value of securities held by banks. The market value of a fixedrate bond, for example, tends to decline with a rise in interest rates, though a risein rates could have the opposite effect on certain derivative securities. When securities are sold, banks report realized losses as current expenses, and they report gains as income. For the District as a whole, banks reported a net realized loss from securities sales of only $79 million through the third quarter of 1994, compared to a net gain of $128 million for the same period in 1993. Only a few banks in the District had losses from securities sales that materially affected earnings, and only in Arizona were the isolated losses large enough to have a noticeable effect on aggregate earnings. The bigger impact on banks was from unrealized losses on securities. Banks currently report unrealized losses on securities classified as availablefor-sale. District banks held about $53 billion in available-for-sale securities as of September 1994, which was about 62 percent of their total investment securities. The unrealized losses reported through the third quarter were about $500 million. While the unrealized losses were large compared to the realized losses, they still were relatively small. Unrealized losses in 1994, for example, represented only about 1 percent of total equity capital for banks in the District. Moreover, even if District banks had booked these losses in 1994, earnings would still have been on a par with their strong 1993 performance. Fred Furlong Vice President Gary Zimmerman Economist REGIONAL BANK DATA SEPTEMBER 3D, 1994 (NOT SEASONALLY ADJUSTED, PRELIMINARY DATA) DISTRICT ALASKA ARIZ. CALIF. HAWAII IDAHO NEVADA OREGON UTAH WASH. TA FOREIGN DOMESTIC LOANS TOTAL FOREIGN DOMESTIC REAL ESTATE COMMERCIAL CONSUMER AGRICULTURAL OTHER LOANS INVESTMENT SEC. TOTAL U,S. TREASURIES U,S. AGENCIES. TOTAL U,S. AGENCIES. M8S OTHER MBS OTHER SECURITIES 350.737 31,774 318.963 167.275 63.383 60.230 6,407 21.669 2,763 N/A 2,756 1.276 836 489 3 152 23.116 0 23.116 9,355 2.778 7,464 405 3,114 224,215 30.240 193.975 114.667 38.680 24,001 3.134 13,493 14,436 1,472 12.964 7,983 3.085 1.086 35 774 8,668 0 8.668 2.814 1.736 2.692 979 447 13.160 0 13,160 2.958 858 9,047 15 2B2 20.157 27 20.130 8,308 5.395 4.264 490 1.674 10.562 0 10.562 4.781 1.690 3.350 172 568 33,660 28 33.632 15.132 8.324 7.838 1,175 1.163 84.797 24,631 23.387 16.011 4.206 32.574 2.065 1.102 444 367 135 384 9,420 2.193 2.972 2.359 269 3.986 51,036 14.606 13,856 9.664 3.373 19.201 4.892 2.128 1,495 976 19 1.249 1.734 448 510 239 46 731 3,845 1.218 895 544 67 1,666 3.672 1.002 999 728 14 1.657 3,618 653 1,413 728 113 1,439 4,514 1.281 803 405 170 2,260 LIABILITIES TOTAL DOMESTIC 479,362 438.508 4.687 4,687 34.572 34.572 310.011 271,484 20.088 17.822 10.696 10.696 18.000 18.000 25,613 25.585 15,379 15.379 40.317 40.285 DEPOSITS TOTAL FOREIGN DOMESTIC DEMAND NOW MMDA & SAVINGS SMALL TIME LARGE TIME OTHER DEPOSITS 404.095 36,958 367,137 97.622 42.228 137.776 62·,414 26.715 383 4.059 0 4.059 1,237 393 1,395 475 496 63 30,610 0 30,610 6.659 3.643 11,471 7.435 1,402 0 268,686 34.583 234.102 65.979 24.377 90,056 35,343 18.112 235 13.712 2.138 11.574 2,308 1.340 4,495 1.915 1.512 4 8.627 0 8,627 1.757 1.085 2.623 2.312 850 0 10.009 0 10.009 3.094 1,499 3.905 921 590 0 21.731 23 21.708 5.118 3,466 7.296 5.011 800 17 11,841 96 11.745 2.568 1.684 4.110 2,424 955 4 34.820 118 34.702 8.903 4.741 12,425 6,578 1,997 59 26.915 45.526 925 3.185 241.224 558 694 41 720 36,387 12,405 28.383 6,957 128,160 3.555 1,863 243 7.575 1.619 900 120 3.807 591 2,437 462 20.912 1.648 2,509 440 15.185 2.156 1.548 223 10,070 3,458 4.007 613 18,408 0.097 0.125 0.080 0,194 0.204 0.130 0.107 0,129 0.071 0.092 0.124 0.077 0.108 0.127 0.081 0.094 0.112 0.075 0.134 0.147 0.117 0,096 0.113 0.084 0.122 0.137 0.086 0.090 0.113 0.082 8.959 785 94 6 675 62 5.568 513 363 12 208 16 420 18 498 54 319 24 814 78 8.830 2.991 409 3.056 83 31 26 1 25 649 221 161 43 224 5,511 1.850 1.597 230 1.835 325 154 82 10 79 188 84 35 6 63 509 113 67 61 267 485 156 140 16 172 342 122 70 16 135 738 260 196 26 257 TAXES NET INCOME 1.158 1.645 10 20 54 21 714 930 38 62 20 38 125 223 82 136 27 42 88 172 ROA (% ANNUALIZED) ROE (% ANNUALIZED) NET INTEREST MARGIN (% ANNUALIZED) 1.27 14.45 4,61 1.53 11.76 4.77 0.22 2,61 4.78 1. " 13.11 4.45 1.14 13.34 3;84 1.32 16.98 4.28 1.98 21.68 4.98 0.97 10.91 4.56 1.59 17.21 5.10 NET CHARGEOFFS. TOTAL REAL ESTATE COMMERCIAL CONSUMER AGRICULTURAL 0.52 0.45 -0.09 1.86 -0.01 0.08 0.01 0.06 0.32 0.00 0.45 0.08 -1.77 1.81 0.07 0.56 0.63 -0.04 2.35 0.12 0.22 0.30 -0.22 1.00 -4.40 0.19 0.01 0.05 0.55 0.18 0.19 ·0.02 -0.13 1.02 -0.21 0.19 -0.04 0.10 0.71 -2.03 0.23 -0.05 0.06 0.95 -0.05 PAST DUE & NON-ACCRUAL, TOTAL REAL ESTATE CONSTRUCTION COMMERCIAL FARM HOME EQUITY LINES MORTGAGES MULTI-FAMILY COMMERCIAL CONSUMER AGRICULTURAL 2.87 4.06 14.29 5.89 3.96 1.08 2.37 5.10 1.82 2.41 2.49 2.19 2.10 9.60 1.66 0.00 1.15 1.93 0.72 2.17 2.17 4.42 1.94 2.27 4.68 5.74 8.15 0,49 1.14 0.72 1.39 2.37 2.32 3.39 5.00 21.83 7.62 4.02 1.15 2.76 7.31 1.92 2,46 2.25 2.38 2.53 3.31 2.33 3.81 1.73 3.20 0.64 2.64 2.33 24.52 1.27 1.09 0.84 1.06 3.65 0.32 1.32 0.00 1.67 1.34 1.41 3.89 2.94 0.05 5.17 0.00 0.73 1.34 0.25 2.67 4.39 1.32 1.03 1.22 3_33 1.50 3.90 0.37 0.98 0.01 0.60 1.06 1.82 1.48 1.34 1.75 1.61 9.93 0.63 1.25 0.82 1.79 1.55 1.71 1.81 2.11 6.55 2;32 2.13 1.18 0.97 0.09 1.63 1.31 3.72 680 N/A 8 2.773 34 18.625 406 N/A 16 8.375 19 4.916 21 7.902 46 15,500 44 7.811 86 20.885 OTHER 80RROWINGS EQUITY CAPITAL LOAN LOSS RESERVE LOAN COMMITMENTS 9.589 TIERl CAPITAL RATIO TOTAL CAPITAL RATIO LEVERAGE RATIO INTEREST FEES & CHARGES EXPENSES TOTAL INTEREST SALARIES LOAN LOSS PROVISION OTHER NUMBER OF BANKS NUMBER OF EMPLOYEES 2,37~ 49i 4.79 36.53 6.60, 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. Research Department Federal Reserve Bank of San Francisco P.O. Box 7702 San Francisco, CA 94120 ~, Printed on recycled paper Q \%I with soybean Inks. ~ DEPOSITORY INSTITUTIONS REQUIRED TO HOLD RESERVES WITH THE FEDERAL RESERVE ON A WEEKLY BASIS PERCENT OF COMBINED MARKET TOTAL FDA NOVEMBER 1994. BY REGION ~ ~ DEPOSIT TYPE C8 SL cu C8 TOTAL DEPOSITS 57 91 66 63 33 46 35 6 25 26 63 44 8 3 9 11 5 11 72 9B 61 58 76 55 DEMAND NOW SAVINGS & MMDA5 SMALL TIME LARGE TIME CB _ COMMERCIAL BANKS; SL ~ cu C8 24 2 34 38 18 4 92 98 8B 89 94 90 SL - SL ~ ~ C8. SL cu C8 SL cu C8 SL B 2 12 11 5 9 51 42 7 90 B 3 60 32 B 60 31 9 24 72 4 37 50 12 62 Be 63 55 49 69 30 6 B 3 33 5 33 12 47 4 21, 10 92 97 90 91 89 94 5 ,0 4 4 9 4 SAVINGS & LOANS AND SAVING BANKS; TYPE OF RETAIL DEPOSIT ACCOUNT OR LOAN ~ cu cu CREDIT UNIONS; cu ~ CB SL 7B 9B 78 76 43 88 17 2 14 15 51 11 cu ~ ~ ~ C8 SL cu C8 SL cu C8 SL cu B3 96 B5 79 78 78 7 2 5 6 13 11 10 2 10 15 B 12 BO 91 B2 74 79 71 5 4 1 2 11 9 16 4 16 23 10 20 56 90 65 54 3B 45 34 9 22 2B 56 10 1 13 lB 6 2 ., MAY NOT SUM TO 100% DUE TO ROUNDING AUG 1992 NOV 1992 FE8 1993 MAY 1983 AUG 1993 NOV 1993 FE8 1994 'MAY 1994 AUG 1994 NOV 1994 SAVINGS ACCOUNTS AND MMDAS U.S DiSTRICT 3.14 3.29 2.90 3.05 2.80 2.96 2.65 2.78 2.55 2.67 2.48 2.58 2.43 2.56 2.50 2.65 2.63 2.81 2.80 2.88 92 TO 182 DAYS CERTIFICATES U.S DISTRICT 3.36 -3.34 3.14 3.14 3.08 3.01 2.98 2.88 2.96 2.85 2.92 2.81 2.93 2.83 3.28 3.03 3.61 3.34 4.22 3.84 2-112 YEARS AND OVER CERTIFICATES U.S DISTRICT 4.87 4.75 4.70 4.49 4.59 4.41 4.45 4.27 4.40 4.19 4.28 4.09 4.35 4.13 4.89 4.58 5.33 4.96 6.08 5.52 COMMERCIAL SHORT TERM FIXED U.S DiSTRICT 4.42 5.38 4.17 4.79 4.16 4.28 3.91 4.19 4.02 4.75 3.95 4.43 4.03 4.95 4.68 6.78 5.28 5.39 5.67 6.32 U.S DISTRICT 5.95 6.29 5.91 6.59 5.85 6.36 5.58 5.40 5.53 6.48 5.56 6.46 5.49 6.36 6.32 6.38 6.83 7.34 7.36 7.78 U.S DISTRICT 6.28 8.20 5.97 6.44 6.43 9.19 6.02 10.86 6.21 8.05 5.38 6.62 5.41 6.58 6.17 N/A 6.66 9.82 7.30 N/A U.S DiSTRICT 6.60 7.63 6.53 8.09 6.38 8.43 6.47 8.55 6.05 8.77 5.70 7.68 5.98 8.16 6.61 6.99 7.59 N/A N/A N/A CONSUMER, AUTOM081LE U.S DISTRICT 9.15 9.39 8.60 8.76 8.57 8.98 8.17 8.23 7.98 8.09 7.63 7.70 7.54 7.68 7.76 7.B6 8.41 8.15 8.75 8.41 CONSUMER, PERSONAL U.S DISTRICT 13.94 13.57 13.45 12.69 13.22 13.00 12.89 12.02 13.33 13.59 12.67 13.63 13.87 12.96 13.68 13.55 12.83 12.26 13.37 12.87 17.66 18.46 17.38 18.29 17.26 17.76 17.15 17.60 16.59 16.30 17.00 16.06 17.17 16.15 16.25 17.34 N/A 16.33 COMMERCIAL SHORT TERM FLOATING COMMERCIAL LONG TERM FIXED COMMERCIAL LONG TERM FLOATING CONSUMER, CREDIT CARD U.S DISTRICT 17.58 SOURCES: MONTHLY SURVEY OF SELECTED DEPOSITS, SURVEY OF TERMS OF BANK LENDING, AND TERMS OF CONSUMER CREDIT MOST COMMON INTEREST RATES ON RETAIL DEPOSITS, WEIGHTED AVERAGE INTEREST RATE ON LOANS 17.61
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