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FABSF

WEEKLY LETTER

Number 92-27, July 24, 1992

First Quarter Bank Results:
Good News, Bad News
After several quarters of poor performance in
the banking sector, the first quarter of 1992
contained some good news. The nation's banks
reported record profits, rising returns on assets
(ROA), and declining problem loan ratios. The
Twelfth Federal Reserve District, however, had
mixed results. Outside of California, the District's
banks performed well, echoing the improvements
in the rest of the country. California's banks, in
contrast, reported declining revenues relative to
the previous year, low ROA, and rising problem
loan ratios. These poor results confirm that the
region's banks are suffering from hard times.
. The results for California banks, however, may
overstate the extent of their problems. California
banks aggressively set aside reserves against
future loan losses, and despite weak earnings,
continued to build equity capital ratios. While
these factors provide some cause for optimism,
it is difficult to say how long the California banks'
problems will persist. In this Letter, we describe
the first quarter bank results and try to place
these results in perspective.

In the nation: higher earnings, lower losses
In the first quarter of 1992, commercial banks
nationally earned a record $7.5 billion, nearly
$2 billion more than in the same quarter of 1991
A favorable interest rate environment especially
helped the nation's banks, as they enjoyed their
highest net interest margins since 1988. Low
interest rates also created opportunities to profit
from the sale of investment securities, which
contributed more than $680 million to the yearover-year improvement in pre-tax earnings. Return on assets for
banks stood at 0.88 in the
first quarter of 1992, up from 0.67 a year earlier.

u.s.

WESTERn BAnKinG

Banks used the increased earnings to add to loan
loss reserves and to build equity capital cushions. Loan loss provisions nationwide were $7.2
billion in the first quarter of 1992, roughly the
same as a year ago. Equity capital as a percent of
total assets rose from 6.7 percent in the first quarter of 1991 to 7.0 percent in the first quarter of
this year.
Accompanying these improved financial results
were declining problem loan ratios nationwide.
Total problem loan ratios (defined as all loans 30
or more days past due or on nonaccrual status,
divided by total loans) fell from 6.7 percent in
the first quarter of 1991 to 6.0 percent in the first
quarter of 1992. Fewer problem real estate loans,
business loans, and consumer loans all contributed to the decline. Net chargeoffs also leveled
off, suggesting that credit quality problems at
banks nationally may have stabilized.

California lags behind
Excluding California, Twelfth District bank performance was strong in the first quarter. Earnings
were $467 million, up 10 percent from the previous year's first quarter. Banks in every state except California and Arizona reported ROAs over
10. Problem loan ratios at banks in the Twelfth
District, excluding California, were stable or declining in the quarter and were below national
averages.
In California, first quarter earnings were $270
million, down 64 percent from a year earlier.
Much of this earnings decline can be attributed
to loan loss provisions of $12 billion-more than
double the provision from the first quarter of
1991-and to the performance of a few of the

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

A ray of hope for California?
The figures above suggest that the difficulties facing California's banks are significant. While the
industry nationwide exhibits steady improvement, the condition of California banks, particularly in the area of problem loan ratios, continues
to worsen. However, the data do provide some
reasons for optimism.

largest banks in the state. Combined earnings at
the ten largest California banks fell 80 percent
from a year earlier, a drop of almost $490 million.
In contrast, the next ten largest banks reported a
cornbined earnings increase of almost 80 percent
(a little over $20 million). But the problems in
California are not confined to a few big banks.
The remaining 450 banks in the state posted a
4 percent decline in combined earnings from the
first quarter of 1991, a drop of about $4 million.
First quarter ROAs reflect the same pattern as
earnings: 0.19 for the ten largest banks, 1.45 for
the next ten largest banks, and 0.58 for the rest
of California's banks.

First, despite a very weak economic climate and
large loan loss provisions, banks in California still
reported positive earnings for the first quarter after two consecutive quarters of negative earnings.
Second, banks in California are actively reclassifying credits, recognizing current and potential
problem loans, and are making large additions
to loan loss reserves. Thus, banks in the state are
actively recognizing that problems exist and have
begun to build the financial reserves to absorb
future losses. Finally, despite the weakness in
earnings, California banks increased equity capital ratios. The ratio for the state's banks was' 6.5
percent of assets in the first quarter of 1992, up
from 6.4 percent inthe first quarter of 1991.

Rising problem loan ratios are particularly evident at California banks. For all banks in the
state, the ratio of problem loans to total loans
rose 1.7 percentage points from a year earlier,
to 7.5 percent (see Chart 1). In fact, problem loan
ratios in ail major loan categories rose from the
first quarter of 1991 to the first quarter of 1992.
PiOblem real estate loans, in particular, plague
Ca.lifornia banks. For example, the problem loan
ratio for construction loans, which are a component of real estate loans, is over 27 percent for
California banks with over $1 billion in assets,
while nationally the average is about 19 percent.
Similarly, problem commercial real estate loans
at these large banks were about 12 percent in
the first quarter, compared to the national average of 8.7 percent. For the smaller California
banks, problem real estate loan ratios were below national averages in the first quarter but rose
significantly.

Chart 1
Problem Loan Ratios

Where have aii the bank loans gone?

Percent

10
U.S. Banks
California Banks
8

6

4
2

1991:11992:1

1991:11992:1

1991:11992:1

1991:11992:1

Total Loans

Real Estate Loans

C&I Loans

Consumer Loans

o

The first quarter results reflect another important development affecting the banking industry
nationally, namely, slow growth in bank assets.
Compared to year-earl ier figures, total assets at
the nation's banks grew only 2.3 percent. More
important, total loans fell over 2.5 percent from
the first quarter of 1991. This year-over-year decline in bank loans includes a 10.2 percent drop
in business loans, a 3.7 percent decline in consumer loans, and a 2.9 percent increase in real
estate loans. The only component of bank portfolios that showed any significant growth was
securities holdings, which rose 15 percent. These
asset growth patterns were even more pronounced
in California: loans dropped 4 percent from the
first quarter of 1991 to the first quarter of 1992,
while securities holdings skyrocketed more than
43 percent.
Clearly, these bank asset growth figures reflect
general economic conditions as well as a shift by
some borrowers away from bank credit. Facing
weak loan demand, banks have sought alternative assets and have accumulated large securities
portfolios, especially of Treasury and government-backed mortgage securities. Regulatory
pressures also may have influenced bank decisionsin this regard, as these securities receive
favorable treatment under the risk-based capital
standards.

Karen J. Trenholme
Research Associate

Jonathan A. Neuberger
Economist

REGIONAL BANK DATA
MARCH 31, 1992
(NOT SEASONALLY ADJUSTED, PRELIMINARY DATA)
DISTRICT

ALASKA

ARIZ.

CALI F.

HAllA II

IDAHO

NEVADA

OREGON

UTAH

IIASH.

9,619
N/A
9,619

15,077
N/A
15,077

25,524
0
25,524

13,937
110
13,827

39,268
68
39,200

18,066
N/A
18,066
6,866
4,642
3,572
443
N/A

8,645
N/A
8,645
3,323
1,645
3,036
154
N/A

29,325
59
29.266
12,709
7,524
6,494
1,043
0

-.------ ----_ .. ------- ----_ .. ---_ .. - .-.----

ASSETS

TOTAL
FOREIGN
DOMESTIC

510,770
34,668

4,580
1

35,650
N/A

345,781
32,453

476,102

4,579

35,650

313,328

21,334
2,036
19,298

LOANS

TOTAL
FOREIGN
DOMESTIC
REAL ESTATE
COMMERCIAL
CONSUMER
AGR I CUL TURE
INTERNATIONAL

359,064
29.520
329,545
168,204
70,842
57,459
5,448
123

2,013
5
2,008
865
685
309
6
N/A

22,249
N/A
22,249
7,218
2,855
5,337
364
7

248,646
28,070
220,575
125,622
48,038
29,886
2,717
115

13,287
1,385
11,901
6,794
3,050
1,179
41
0

6,535
N/A
6,535
2,037
1,508
665
N/A

10,300
N/A
10,300
2,771
895
5,872
15
N/A

57,702
19,227
26,748
11,726

1,953
847
592
514

5,973
2,072
2,987
914

30,939
9,877
15,325
5,737

4,493
2,103
1,643
747

1,767
359
915
493

2.253
1,075
692
486

3,783
1,114
1,760
909

2,889
518
1,667
703

3,652
1,262
1,167
1,223

LIABILITIES TOTAL
DOMESTIC

475,131
440,463

4,003
4,003

32,920
32,920

323,385
290,932

19,865
17,830

8,925
8,925

13,675
13,675

23,369
23,369

12,772
12,662

36,217
36,149

DEPOSITS

413,291
32,717
380,574
85,945
294,629
40,084
90,434
41,437
80,137
42,122

3,501
1
3,500
1,009
2,491
288
547
565
558
504

30,309
N/A
30,309
5,178
25,131
3,281
7,367
2,829
9,840
1,796

283,670
30,709
252,961
61,086
191,875
24,793
63,581
26,420
45,880
30,992

15,648
1,788
13,859
2,248
11.611
1,470
2,046
2,657
2,168
3,268

7,496
N/A
7,496
1,224
6,271
950
1,369
763
2,627
561

9,046
N/A
9,046
2,140
6,907
1,147
2,337
1,439
1,118
803

20,107
N/A
20,107
3,727
16,380
2,877
4,256
1,853
6,341
1.049

10,534
110
10,424
1,945
8,479
1,378
1,899
1,187
3,208
803

32,980
108
32.871
7,3B7
25,484
3,899
7,031
3,724
8,338
2,344

41,061
35,639
10,783

459
577
41

2,078
2,730
556

22,728
22.396
8,332

3,604

1,312
694
96

3,861
1,402
362

2,694

212

429

2,027
1,165
213

2,299
3,051
542

LOAN LOSS RESERVE (ALL BANKS)
NET CHARGEOFFS, TOTAL
REAL ESTATE
COMMERCIAL
CONSUMER
AGR I CUL TURE

3.00
1.40
0.79
1.75
3.20
0.30

2.02
0.12
-0.06
0.27
0.33
N/A

2.50
1.94
1.79
6.31
2.66
-0.44

3.35
1.54
0.90
1.87
4.03
0.39

1.60
0.20
0.00
0.50
0.66
N/A

1.47
0.36
-0.03
0.81
0.63
0.03

3.52
2.72 ,
0.37
1.01
4.32
N/A

2.37
0.68
0.15
1.20
1.65
0.14

2.47
1.07
0.47
0.74
2.17
1.87

1.85
0.66
0.25
0.70
1.24
0.39

PAST DUE & NON-ACCRUAL, TOTAL
REAL ESTATE
COMMERCIAL
CONSUMER
AGR I CULTURE

6.35
7.82
7.22
3.48
6.19

5.28
5.36
5.92
2.92
N/A

4.15
7.58
7.63
2.64
8.59

7.45
8.71
8.17
4.03
7.19

2.18
2.22
2.76
1.92
1.19

2.44
3.08
2.44
1.47
4.62

5.55
6.73
6.59
5.48
0.17

4.17
5.09
5.62
1.67
6.37

3.38
4.71
3.15
2.37
3.18

4.16
5.76
4.10
1.92
3.85

SECURITIES

TOTAL
U.S. T.5.
SECONDARY MARKET
OTHER SEC.

TOTAL
FOREIGN
DOMESTIC
DEMAND
TIME AND SAVINGS
NOW
MMDA
SAVINGS
SHAll TIME

LARGE TIME
OTHER BORROWINGS
EQU ITY CAP lTAL
LOAN LOSS RESERVE

1,469

I,m

2,155

INCOME

TOTAL
INTEREST
FEES & CHARGES

12,475
10,002
724

109
88
6

821
655
52

8,360
6,715
495

445
400
11

223
192
14

544
386
12

645
509
44

357
290
20

971
767
70

EXPENSES

TOTAL
INTEREST
SALARIES
LOAN LOSS PROVISION
OTHER

11,116
4,269
2,298
1,576
2,974

78
32
23
2
22

782
311
158
90
223

7,698
2,905
1,594
1,225
1,975

353
193
79
15
67

180
90
32
8
51

377
91
39
81
166

523
211
132
46
134

296
122
50
32
92

829
314
191
79
244

INCOME 8EFORE TAXES
TAXES
NET INCOME

1,323
602
737

31
9
21

39
24
27

627
360
270

92
33
59

42
15
28

167
56
III

121
41
80

61
19
42

143
45
98

ROA
ROE
NET
NET

0.58
8.27
4.50
-2.32

1.90
14.85
5.05
-2,53

0.31
3.98
3.90
-2.51

0.31
4.83
1 39
•.
-2.37

1.17
16.17
4.08
-2.02

1.17
16.05
4.27
-2.18

2.96
31.56
7.90
-1.30

1.26
14.92
4.67
-2.10

1.25
14.51
4.96
-2.20

1.01
12.84
4.68
-2.45

771
239,500

B
2,579

39
18,277

468
154,699

19
8,350

22
4,893

19
6,125

51
15,623

54
7,137

91
21,817

(%)
(%)

INTEREST MARGIN (%)
OVERHEAD 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.

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DEPOSITORY INSTITUTIONS REQUIRED TO HOLD RESERVES WITH THE FEDERAL RESERVE ON A WEEKLY BASIS
(PERCENT OF COMBINED MARKET TOTAL FOR MAY 1992, BY REGION)
DISTRICT

ALASKA

DEPOS IT TYPE

CB SL

cu

TOTAL DEPOSITS
DEMAND

5440
90 4
64 28
6032
3363
4845

6

71

5

99

8
8
3
7

59
54
75
94

NOW
SAVINGS & MMDAS
SMALL TIME
LARGE TIME
CB

ARIZONA

CALIF

HAWAII

NEVADA

IDAHO

OREGON

UTAH

WASH

CB SL

cu

CB SL CU

CB SL CU

CB SL CU

CB SL CU

CB SL CU

CB SL CU

CB SL CU

CB SL CU

4
0
6
4
8
2

25

92
95
89
90
95
94

4847
90 5
5835
5638
25 73
4349

6728
89 4
6730
61 31
46 50
81 16

91 5
94 0
93 3
93 4
89 10
88 6

72
98
78
82
41
59

80
94
84
76
76
79

9
1 5

35
41
16
4

78 814
89 4 7
83 4 13
71 623
78 15 7
73 11 16

56
90
64
57
40
50

1

= COMMERCIAL BA'NKS; SL = SAVINGS

0
0

7
5

0 11
0 10

1 4
0 5

5

6
6
6

3
8

& LOANS AND SAVINGS BANKS; CU

5

7
3
8
4

3

3
6
3
3
1

5

25

3

2 0
16
15
56
41

6

4
3
0

11

8 8
11 13
18 6
11 10

35 9
7 4
24 12
26 18
56 4
48 2

= CREOIT UNIONS; MAY NOT SUM TO 100% DUE TO ROUNDING

TYPE OF ACCOUNT OR LOAN

DATE

US

DISTRICT

ARIZ

CALIF

HAWAII

IDAHO

OREGON

UTAH

WASH

SAVINGS ACCOUNTS AND MMDAS""

MAR92
APR92
MAY92

3.74
3.63
NA

3.79
3.70
3.67

3.45
3.25
3.22

3.70
3.60
3.56

4.01
4.02
3.88

4.17
4.01
4.04

3.53
3.42
3.37

4.00
3.91
3.86

3.68
3.65
3.68

92 TO 182 OAYS CERTIFICATES

MAR92
APR92
MAY92

4.01
3.90
NA

3.86
3.81
3.76

3.67
3.61
3.47

3.82
3.75
3.63

4.08
4.08
4.05

3.72
3.68
3.72

3.73
3.66
3.60

4.13
4.02
3.93

3.85
3.93
4.00

2'1/2 YEARS AND OVER CERTI FICATES

MAR92
APR92
MAY92

5.49
5.48
NA
5.38
44
6.78
40
8.06
14
9.52
14.28
17.97

5.10
5.15
5.17
6.59
199
7.76
41
7.09
7
9.67
13.80
18.52

4.50
4.47
4.47
7.66
145
NA
NA
7.09
NA
10.25
14.38
18.00

5.16
5.18
5.08
6.75
226
7.29
33
7.02
9
9.74
14.50
18.98

5.71
5.71
5.63
7.13
91
8.72
30
NA
NA
NA
NA
NA

5.46
5.46
5.62
NA
NA
NA
NA
7.78
NA
10.50
11.00
NA

5.09
5.12
5.37
6.88
57
NA
NA
6.91
7
8.98
12.38
19.25

5.32
5.32
5.30
7.20
251
8.64
57
5.01
2
9.82
14.98
21.00

4.93
5.14
5.30
5.91
32
NA
NA
7.75
6
8.96
12.43
17.97

-----_ ...... _------- .... _--------- .. _--------.- .. __ ... ----.-._------------._._ ... -----------.- ... __ .---- ... -------_ ..... ----._.

COMMERCIAL, SHORT - TERM"
COMMERCIAL, LONG-TERM"
LOANS TO FARMERS"
CONSUMER, AUTOMOBILE
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 8ANK LENDING AND TERMS OF CONSUMER CREDIT; MOST COMMON INTEREST RATES ON SELECTED ACCOUNTS.
" DATA ARE COMPOUNDED ANNUAL RATES. "" SAVINGS AND MMDAS COMBINED AS OF APRIL 1992.