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FRBSF WEEKLY LETTER Number 91-27, July 26, 1991 Real Estate Loan Problems in the West Real estate loans have been a source of losses for banks in many areas of the country since before the recession began. Recently, Federal Deposit Insurance Corporation Chairman William Seidman raised concerns about problem real estate loans in California, which has focused attention on the qual ity of real estate loans at western banks, especially those headquartered in California. In this Letter problem loan ratios are evaluated to gauge the severity of the recent deterioration in western banks' real estate loan portfolios, vvhich include about half of all bank loans. Clearly, the problems experienced in the region reflect the impacts of the recession and the real estate slump. However, the evidence also suggests that asset quality deterioration has been less severe in the West than in the nation as a whole, and that current indicators are not out of line with those at the end of the last recession. Commercial real estate problems in the West, as measured by problem loan ratios, is still better than that reported by the industry as a whole. In March 1991 problem loan ratios were 5.66 and 5.82 percent for western and California banks, respectively, compared to 8.8 percent for the nation. Furthermore, the historical time series for problem real estate loans at large banks (with over $100 million in assets) shown in the chart also helps to put the current figures in perspective. Despite the upturn in problem realestate loans in the West after June 1990, problem loan ratios for the region also remain well below that experienced at the end of the last recession in 1982. Problem Real Estate Loans* Percent 11 10 9 , '.'. ,". .... ,'"~"'" 8 Banks' equity capital and loan loss reserves provide a cushion against losses on real estate, commercial, and consumer loans and against the risk of earnings disruptions arising from asset quality problems. However, while banks nationwide have added about $19 billion in equity capital and loan loss reserves since year-end 1989, their "problem" loans (defined as loans 30 days or more past due or no longer accruing interest) have increased by nearly double that amount. 'Annual data 1983-1988; quarterly data 1989-1991 In the three quarters since June 1990, such problem real estate loans in the western region have nearly doubled as a percent of total real estate loans. Despite this increase, asset quality The data for March 1991 for the first time also provide a breakdown of real estate loans by category for all banks. These data clearly indicate the WESTERn BAnKinG \ •...•. Twelfth District .... 7 6 --~ \ 5 US'" ... _ - - - - 4 3 2 1 California 83 84 85 86 87 88 89 90 91 Western Banking is a quarterly review of banking developments in the Twelfth Federal Reserve District. it is published in the Weekly Letter on the fOUith Friday of January, April, July, and October. o FRBSF sources and magnitude of real estate loan problems. Nationally, only 3.2 percent of single family loans are reported as problem loans in March; in the western region, the number is even smaller - L9 percent. Commercial real estate and construction loans, however, both in the nation and in the region, have deteriorated much more. About 13 percent of all bank loans in the nation, or $240 billion, are secured by commercial real estate. Western banks ($43.7 billion) and California banks ($30.7 billion) hold about the same share of their loan portfolio in commercial real estate loans as do banks nationally. In March, U.S. banks reported that 9.39 percent, or $22.5 billion, of their commercial real estate loans were past due or on nonaccrual status. These ratios also are high in the region (6.75 percent) and in California (7.28 percent), but are still well below the industry average; these ratios are less than half the problem loan ratios reported in the depressed Northeast region. Commercial real estate loan problems are likely to remain a major drag on asset quaiity and earnings, because overbuilding in this sector has resulted in high vacancy rates and falling rental rates in many markets. Salomon Brothers, for example, estimated that there is roughly an ll-year supply of commercial office space nationally. Thus many analysts expect that commercial real estate loans may continue to deteriorate even if the economy turns around quickly. Construction loan problems Construction financing traditionally has been a relatively high risk activity, reflecting the nature of the construction industry itself. Nationally, banks' troubled loan figures for March bear this out. Problem construction loans, at $22.8 billion, exceeded the amount of troubled commercial real estate loans, even though outstanding construction and land development lending for the U.s., at $121 billion, is only half the level of commercial real estate lending. Further deterioration in construction loan quality could have a disproportionate impact on banks' performance in the West, because construction lending is a larger part of banks' loan portfolios in this region than in the nation. In March 1991, construction lending accounted for 6.5 percent of total loans for the U.s., 9.1 percent for the region, and 9.7 percent in California. Still, western banks are reporting lower levels of problem construction loans than banks nationally. In March U.S. banks reported that 18.8 percent of their construction loans were problem loans, whereas banks in the region and California reported 13.4 and 14.2 percent, respectively. In contrast, New England banks reported problem loan ratios more than twice the ratio for California. Given many analysts' prognoses for a weak recovery in construction and housing, and the likelihood that the high level of problem loans today may result in increased loan charge-off rates in the future, even the lower level of deterioration reported in this region will be a major challenge. Big picture Clearly, banks in California and the West have experienced a significant increase in problem real estate loans since the onset of the recession. And, depending on the strength and timing of the recovery, nationally as well as in this region, problem loans could continue to rise until improved business conditions are reflected in the cash flows and on the balance sheets of banks' borrowers. Certainly, recent actions by several large western banks to boost loan loss reserves in the second quarter suggest that a recovery in asset quality will follow a normal patternlagging a turnaround in the economy, rather than moving with it. Still, problem loan ratios suggest that real estate loan deterioration has been less severe in the West than in the nation as a whole or in the depressed northeastern states. And, by comparison to the end of the 1982 recession, real estate loan deterioration in this region has not been so severe. Thus, while California may now be an area of concern, at least through the first three quarters of the recession, real estate loans at the state's banks continued to outperform the nation. Gary C. Zimmerman Economist REGIONAL BANK DATA HARCH 31, 1991 (Not Seasonal! y Adjusted, Preliminary Data) DISTRICT ALASKA -------- ARIZONA .. _------ CALIF. ---- .. --- HAWAII IDAHO ........ ---- .. --_ ...... - NEVADA OREGON UTAH WASH • ASSETS AND lIA8lLITIES -. $ MILLION ASSETS TOTAL FOREIGN DOMESTIC 497,723 37,956 459,767 4,348 1 4,347 33,855 N/A 33,855 341,677 35,855 305,822 17,945 1,865 16,080 8,938 N/A 8,938 14,753 N/A 14,753 25,202 15 25,187 11,862 59 11,803 39,144 162 38,982 LOANS TOTAL FOREIGN DOMESTIC REAL ESTATE COMMERCIAL CONSUMER AGR I CULTURE INTERNATIONAL 364,141 33,605 1,925 6 1,919 758 689 287 4 N/A 22,017 N/A 22,017 7,080 3,598 4,458 408 10 258,899 32,163 226.736 124;314 54,362 31,870 2,676 169 10,660 1,293 9,366 4,708 2,819 1,255 18 0 5,839 N/A 5,839 1,674 1,451 1,656 605 N/A 10,729 N/A 10,729 2,606 1,353 6,267 15 N/A 16,956 N/A 16,956 6,200 5,223 3,462 402 N/A 7,416 N/A 7,416 2,899 1,654 2,067 142 N/A 29,700 142 29,558 12,805 7,603 6,192 1,063 0 SECURITIES TOTAL U.S. T.S. SECONDARY MARKET OTHER SEC. 330,536 163,044 78,753 57,515 5,332 179 44,479 12,723 20,382 11,374 1,849 929 455 465 4,351 1,299 1,893 1,159 21,602 5,939 10,588 5,075 3,884 1,362 1,637 884 1,738 393 873 472 1,798 556 640 602 3,318 651 1,676 991 2,373 471 1,355 547 3,567 1,122 1,266 1,179 464,465 426,509 398,222 34,864 363,359 3,834 3,833 3,278 0 3,278 31,431 31,431 29,530 N/A 29,530 319,807 283,953 273,213 32,865 240,348 16,857 14,992 15,172 1,681 13,490 8,347 8,347 6,996 N/A 6,996 13,585 13,585 8,668 N/A 8,668 23,219 23,204 19,814 2 19,812 11,049 10,990 9,517 59 9,458 36,336 36,174 32,036 256 31,779' 77,063 286,296 35,423 74,343 33,354 86,114 56,750 874 2,404 247 420 411 722 582 4,541 24,989 2,721 6,005 2,046 12,096 2,107 54,946 185,402 22,237 51,021 22,357 47,606 42,039 2,185 11,305 1,343 2,046 1,530 1,819 4,565 1,182 5,814 828 1,105 438 2,798 641 1,956 6,712 959 2,032 1,216 1,389 1,115 3,158 16,654 2,457 3,725 1,556 7,001 1,888 1,668 7,790 1,199 1,570 871 3,337 807 6,552 25,227 3,433 6,419 2,929 9,347 3,006 43,785 33,258 7,745 194,429 35,515 508 514 36 543 11 1,315 2,424 638 11,999 356 28,208 21,869 5,675 143,792 34,293 1,155 1,088 159 5,692 54 1,261 592 89 2,139 42 4,147 1,167 270 2,114 96 2,685 1,983 273 9,523 363 1,354 812 154 3,043 30 3,152 2,808 451 15,583 271 LOAN LOSS RESERVE (ALL 8ANKS) NET CHARGEOFFS, TOTAL REAL ESTATE COMMERCIAL CONSUMER AGRICUL TURE 2.13 1.21 0.36 0.71 2.57 -.28 1.88 0.08 -.04 0.00 0.66 N/A 2.90 1.25 1.30 1.79 1.91 2.12 2.19 1.29 0.32 0.60 2.95 -.88 1.49 0.07 0.01 -.00 0.52 -3.90 1.52 0.38 0.05 0.49 0.69 0.38 2.51 3.27 0.03 4.93 4.41 -.06 1.61 1.00 0.52 1.24 1.35 0.28 2.07 1.11 0.68 1.80 1.63 0.20 1.52 0.48 0.37 0.32 1.09 -.27 PAST DUE & NON-ACCRUAL, TOTAL REAL ESTATE COMMERCIAL CONSUMER AGRICULTURE 5.41 5.66 6.52 3.88 6.74 5.46 5.16 7.10 2.81 34.80 5.97 10.40 13.50 1.67 9.85 5.83 5.82 7.03 3.49 7.87 1.52 1.42 2.06 2.25 9.92 1.90 2.10 1.98 1.63 3.56 8.78 3.51 8.42 11.40 1.19 3.33 4.00 3.76 1.66 5.17 4.30 6.39 4.46 2.47 3.78 3.57 4.62 3.04 2.20 4.73 lIA81L1T1ES TOTAL DOMESTIC TOTAL FOREIGN DOMESTIC DEPOSITS DEMAND TIME AND SAVINGS NOW MMDA SAVINGS SMALL TIME LARGE TIME OTHER 80RROWINGS EQUITY CAPITAL LOAN LOSS RESERVE LOAN COMMITTMENTS LOANS SOLD INCOME TOTAL INTEREST FEES & CHARGES 13,569 11,280 647 111 95 5 847 673 46 9,324 7,795 436 432 387 10 227 200 12 607 441 15 654 540 41 317 271 18 1,049 878 64 EXPENSES TOTAL INTEREST SALARIES LOAN LOSS PROVISION OTHER 11,732 5,993 2,241 838 2,661 89 45 22 2 20 826 400 165 60 200 8,086 4,191 1,553 555 1,788 355 215 70 9 60 189 111 30 5 43 478 164 53 98 163 550 278 116 44 112 276 144 44 21 67 883 445 188 43 207 1,830 664 1,165 22 6 16 21 -3 24 1,230 488 741 78 28 50 38 13 25 130 32 98 104 33 72 41 15 26 166 52 114 0.95 14.0 4.29 1.46 12.3 4.61 0.29 3.96 3.34 0.87 13.5 4.24 1.12 18.3 3.88 1.17 17.1 4.09 2.68 33.5 7.60 1.19 14.4 4.39 0.88 12.8 4.29 1.18 16.2 4.48 INCOME BEFORE TAXES TAXES NET INCOME ROA (%) ROE (%) NET INTEREST MARG I N (%) 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 (Judith Goff) 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. OUI:'6 v:::> 'OJSpueJ:I ueS WLL xog 'O'd O)SI)UOJ:I UOS JO aAJaSa~ ~uo8 IOJapa:l ~uew~Jodea lpJoese8 DEPOSITORY INSTITUTIONS REQUIRED TO HOLD RESERVES ~ITH THE FEDERAL RESERVE ON A ~EEKLY BASIS PERCENT OF COMBINED MARKET TOTAL FOR MAY 1991, BY REGION DISTRICT ALASKA DEPOS IT TYPE CB SL CU CB SL CU CB SL CU CB SL CU CB SL CU TOTAL DEPOSITS DEMAND 52 43 5 91 4 5 64 29 7 .51 32 17 65 33 2 34 63 3 4749 3 73 99 59 37 89 4 23 77 0 1 6 35 3 61 8 2 8 15 89 5 6 94 0 6 88 3 9 71 3 26 95 4 1 88 9 4 94 3 3 91 46 91 59 49 60 25 42 69 28 3 91 3 6 72 27 2 53 38 9 80 20 0 43 54 3 82 17 1 NO~ SAVINGS MMDA SMALL TIME LARGE TIME ARIZONA 3 6 CALIF 50 HA~All 4 4 5 35 6 39 13 38 2 73 3 54 3 IDAHO' NEVADA OREGON UTAH ~ASH CB SL CU CB SL CU CB SL CU CB SL CU CB SL CU 87 9 90 1 88 8 78 11 94 6 85 14 85 10 70 26 4 99 1 0 77 15 9 66 17 17 82 16 2 4948 3 6633 0 82 12 7 94 1 5 85 8 7 60 20 20 91 5 4 76 18 5 89 8 3 78 88 84 58 82 8 14 5636 8 91 5 4 65 23 12 44 20 36 6830 2 43 53 4 4752 1 4 9 3 11 0 2 5 3 9 3 5 6 77 13 82 9 13 37 12 10 9 CB = COMMERCIAL 8ANKS; SL = SAVINGS & LOANS AND SAVINGS BANKS; CU = CREDIT UNIONS; MAY NOT SUM TO 100% DUE TO ROUNDING TYPE OF ACCOUNT OR LOAN ARIZ CALIF IDAHO OREGON ~ASH DATE US DISTRICT HA~AII UTAH .... ---_ ..... _--- ..... -----------_. __ . __ ._--------_ .... ----_ ...... --_ ... _----_ ... _..... ...... - ... _-------- .... _----.-----5.65 5.63 5.33 5.31 MONEY MARKET DEPOS IT ACCOUNTS MAR91 5.58 5.52 5.29 5.58 5.43 APR91 5.46 5.41 5.17 5.55 5.29 5.61 5.25 5.30 5.52 MAY91 5.28 5.05 5.33 5.13 5.56 5.11 5.33 5.56 5.29 _-_.-_ 92 TO 182 DAYS CERTIFICATES MAR91 APR91 MAY91 6.28 6.11 5.91 5.99 5.88 5.78 5.61 5.50 5.46 6.10 5.97 5.83 5.90 5.81 5.64 5.94 5.91 5.89 6.13 5.98 5.85 5.88 5.84 5.73 6.36 6.18 6.01 2'1/2 YEARS AND OVER CERTIFICATES MAR91 APR91 MAY91 7.04 6.95 6.90 6.66 6.68 6.66 6.30 6.30 6.30 6.83 6.88 6.89 6.95 6.95 6.95 7.03 7.05 7.15 6.68 6.89 6.83 6.73 6.74 6.61 6.91 6.84 6.75 7.75 47 9.24 40 9.84 10 8.54 153 9.02 43 8.67 8 9.43 167 10.27 37 8.74 6 8.64 188 8.99 43 8.63 9 8.50 162 10.51 53 NfA NfA 9.09 135 NfA NfA 10.32 11 8.55 102 7.79 29 9.87 12 8.18 78 10.17 38 6.42 6 8.11 118 NfA NfA 9.65 8 11.28 15.16 18.22 11.83 15.14 18.50 12.63 16.50 18.00 12.59 19.27 18.82 NfA NfA NfA COMMERCIAL, SHORT' TERM" COMMERCIAL, LONG-TERM" LOANS TO FARMERS" AVE. AVE. AVE. AVE. AVE. AVE. RATE MAT. (DAYS) RATE MAT. (MONTHS) RATE MAT. (MONTHS) 12.00 10.74 11.00 10.95 12.50 13.90 15.51 12.38 NfA 19.24 19.48 17.97 --- .................... - .. .............................................................................. .................................... ............ .... ........ ................ -_ .................... .......... SOURCES: SURVEY OF TERMS OF BANK LENDING AND TERMS OF CONSUMER CREDIT; MOST COMMON INTEREST, RATES ON SELECTED ACCOUNTS. " DATA ARE COMPOUNDED ANNUAL RATES. CONSUMER, AUTOMOBILE CONSUMER, PERSONAL CONSUMER, CRED IT CARDS -_ -_ AVE. RATE AVE. RATE AVE. RATE -_ -_ -_ -_ -_ -_
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