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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. @~ OUt6 \'J 'o:>spUI!.l:l UI!S lOLL xog 'O'd O)SI)UOJ~ UOS >iU08 JO aAJaSa~ IOJapa~ ~uaw~Jodaa 4)JOaSa8 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 IDAHO NEVADA 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.