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FRBSF WEEKLY LETTER April 26, 1991 Record Earnings, But. Despite a fourth quarter marked by a sharp decline in net income and a noticeable softening of asset quality, overall bank performance in the region for 1990 was good. Earnings reached a record $4.8 billion, and return on assets (ROA) remained at nearly 1 percent. In the aggregate, banks in the West outperformed the industry for the third year in a row. This strong performance is underscored by their contribution to aggregate industry earnings in 1990. While western banks' $493 billion in assets accounts for only 14.6 percent of bank assets nationwide, their earnings accounted for 29.1 percent of industry earnings for the year and more than 57 percent of industry earnings in the fourth quarter. The superior performance was due to stronger asset qual ity and faster growth. Because of their strong performance, western banks also were able to make sizable additions to their capital bases. • • • banks in Arizona continued to lose money in 1990, the aggregate loss was only a small fraction of the 1989 losses. Dismal fourth quarter For the first three quarters of the year, asset quality and earnings at western banks remained strong; in the fourth quarter, earnings plunged (see accompanying chart). Western Bank Earnings ($) Millions 1,600 Net Income by Quarter 1,400 t 1,200 1,000 800 600 Industry performance Industry earnings nationwide trended downward from over $6 billion in the first quarter to a dismal $1.4 billion in the fourth quarter. And while net income of $16.6 billion was a slight improvement over 1989 earnings, it was far below the record $24.8 billion earned in 1988. Because of increases in troubled assets, the nation's largest banks (over $1 billion in assets) recorded ROAs of .40 or less, about half the ROAs of smaller banks. Banks in Alaska, Hawaii, Idaho, Oregon, Utah, and Washington reported increased earnings for the year, and all except Utah recorded ROAs of greater than 1 percent, a level considered excellent for the industry. As a result of asset quality pressures, California and Nevada bank earnings declined slightly from record levels in 1989, although ROAs remained high. Finally, although WESTERn BAnKinG 400 200 I ID~ II III IV II III IV o - - 1989 - --1990-12th District California As the recession took hold, western banks, especially California banks, reported an upturn in problem loans. The aggregate ratio of loans past due (30 days or more) plus non accrual loans to total loans rose to 5.05 percent from the 4.40 percent ratio for the first three quarters. Moreover, the increases were pervasive, driving up the ratios for real estate, commercial, and consumer loans. Despite these increases, in all western states except Arizona, nonperforming loan ratios generally still remain well below industry ratios. 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 Weakness in the economy and in asset quality led western banks to increase their exoense for building loan loss reserves by $1.5 biliion in the fourth quarter alone, and $3.9 billion for the year. Since banks' provisions for loan loss reserves are counted as a current expense, increased loan loss provisions directly reduce banks' net income. Thus, while banks in the West generally benefited from relatively favorable levels of problem loans, by the fourth quarter the overall deterioration in the economy and asset quality had dampened even their performance. Real estate loans led growth While bank assets nationwide grew at an anemic 2.7 percent in 1990, in both the West and California banks' assets grew at a rate of more than 6 percent. The patterns of growth between the nation and the region also differed. Nationally, total assets and loans grew at about the same rate; but in the West total loans grew faster than assetsover 11 percent for the region and 13 percent for Cal ifornia. - Real estate loans accounted for almost all of the asset growth in the region. Western banks reported a 20.8 percent increase in total real estate loans outstanding for the year, and California banks reported even faster growth, 24.2 percent, both well above the 8.4 percent increase for the industry as a whole. These numbers tend to overstate the situation, however; consolidation in the thrift industry has allowed banks to capture thrift market share and, through thrift acquisition, to add real estate loans worth several billion dollars to their books. Yet, even excluding loans acquired from thrifts, western banks still increased their real estate loans by about twice the industry rate. Loans secured by single-family residential properties, paced by very rapid increases in home equity lines of credit, climbed at a sharp 26 percent rate in the West, about twice the national rate. In contrast, commercial real estate lending weakened significantly as the year progressed due to both overbuilding in many commercial and retail real estate markets and deterioration in the quality of housing and construction loans, factors that also led banks to tighten lending standards. Still, construction lending in the region rose nearly 4 percent for the year. One result of the continued growth in total real estate loans was that by year-end, aggregate real estate loans soared to 49 percent of bank loans in the region; California (with 55 percent) and Hawaii (54 percent) significantly exceeded the national average of 42 percent. High levels of exposure in these states have raised concerns about the ability of banks to maintain asset quality should real estate markets continue to soften. Other forces Along with relatively strong asset quality and strong growth, western banks also benefited from small reductions in net overhead expenditures per dollar of assets. For the most part, however, these savings were offset by lower net interest margins throughout the industry: the interest income banks earned (per dollar of assets) fell more than their cost of funding those assets. Because of lower levels of problem loans and more rapid growth, banks in the West outperformed the industry by a wide margin in 1990 and added $4 billion in book value equity capital in 1990. Most of the increase came from $2.5 billion in retained earnings. In view of the problems facing the industry, such increases in capital are an important step towards maintaining an adequate capital cushion against future asset quality problems and in providing capital for potential expansion and acquisitions. Despite these actions, the recession and fourth quarter deterioration in asset quality and earnings will continue to pressure western banks. If 1991 is to be as strong as 1990, western banks will need a favorable rebound in the western economy to improve their borrowers' financial health. Gary C. Zimmerman Economist REGIONAL BANK DATA DECEMBER 31, 1990 (Not Seasonally Adjusted, Prel ;m;nary Data) --_ ... --- ALASKA ...... __ ... - ... _.......... .. .... _---- -------- IDAHO NEVADA OREGON UTAH WASH. 492,755 38,491 454,264 4,450 0 4,450 32,621 N/A 32,621 339,908 303,813 17,865 2,050 15,815 8,583 N/A 8,583 14,439 N/A 14,439 22,949 N/A 22,949 12,192 80 12,112 39,748 266 39,481 364,592 33,952 330,640 161,463 80,408 57,497 5,847 190 1,964 7 1,957 769 699 290 4 N/A 21.095 N/A 21,095 6.610 3,652 4,698 445 10 260.999 32,569 228.429 124,265 55.453 32,128 2,978 173 10,536 1,262 9.274 4,473 2,852 1,309 42 0 5.775 N/A 5,775 1.555 1,533 1.635 712 N/A la, 278 N/A 10,278 2,686 1,434 5,699 18 N/A 16,314 N/A 16,314 5,537 5.328 3,392 427 6 7,719 N/A 7,719 2,901 1,708 2,138 141 N/A 29,913 114 29,799 12,667 7,748 6,208 1,080 0 43.435 12,343 19,550 11,542 1,767 975 350 441 4.011 1,179 1.751 1,080 21,384 6,021 10,197 5,166 3,745 1,162 1,714 870 1,706 395 812 498 1,793 515 639 640 3,184 583 1,550 1,050 2,348 459 1,302 586 3,497 1,053 1,234 1,211 460,351 421,859 398,426 34,681 363,745 3,951 3,951 3,494 0 3,494 30,339 30.339 28.368 N/A 28,368 318,321 282,226 274,912 32,370 242,542 16,813 14,763 15,406 1,864 13,542 8,024 8,024 6,916 N/A 6,916 13,282 13,282 8,910 N/A 8,910 21,268 21,268 18,015 N/A 18,015 11,396 11.316 9,647 80 9,567 36,957 36,690 32,758 367 32,391 84,070 279,675 35,285 70,585 31,714 84,083 57,690 996 2,498 256 444 394 762 622 4,914 23,454 2,567 5,568 1,693 11,344 2,261 59,536 183,006 22,353 48,241 21,823 47,973 42,486 2,443 11,099 1,439 2,045 1,479 1,806 4,328 1,232 5,684 794 1,042 401 2,735 674 2,158 6,751 965 1,919 893 1,458 1,517 3,519 14,496 2,340 3,461 1,376 5,465 1,836 1,978 7,589 1,169 1,583 820 3,281 732 7,293 25,097 3,403 6,281 2,835 9,257 3,233 39,674 32,404 7,920 198,614 50,155 415 499 35 532 13 1,382 2,282 648 11,902 369 25,264 21,587 5,882 146,878 48,854 880 1,052 152 7,280 101 1,022 559 89 1,916 73 3,527 1,157 256 2,113 88 2,607 1,682 266 9,384 378 1,567 796 151 3,008 25 3,012 2,791 441 15,601 253 LOAN LOSS RESERVE (ALL BANKS) NET CHARGEOFFS, TOTAL REAL ESTATE COMMERCIAL CONSUMER AGRI CULTURE 2.17 1.14 0.35 0.71 2.09 -.26 1.77 1.12 1.93 0.73 0.42 N/A 3.07 1.98 2.40 4.15 2.31 -.02 2.25 1.17 0.25 0.58 2.06 -.83 1.44 0.08 -.01 -.07 0.56 4.55 1.54 0.35 0.14 0.46 0.63 0.04 2.49 3.21 0.29 2.72 4.85 0.37 1.63 0.53 0.21 0.57 1.19 0.39 1.96 0.81 0.50 1.36 1.20 0.34 1.48 0.47 0.36 0.29 0.95 0.64 PAST DUE & NON-ACCRUAL, TOTAL REAL ESTATE COMMERCIAL CONSUMER AGR ICUL TURE 5.05 5.18 5.80 3.92 5.42 5.14 6.09 6.07 2.09 39.10 6.50 11.80 12.80 2.04 10.20 5.25 5.08 6.23 3.22 5.98 1.19 1.12 0.94 2.04 4.02 2.09 2.47 2.13 2.00 2.40 9.74 5.21 7.28 12.80 0.66 3.66 4.73 4.16 1.71 2.21 3.83 5.81 3.63 2.88 2.54 3.51 4.53 2.54 2.86 4.95 DISTRICT ASSETS AND LIABILITIES ($ MILL.) ASSETS TOTAL FOREIGN DOMESTIC LOANS TOTAL FOREIGN DOMESTIC REAL ESTATE COMMERCIAL CONSUMER AGRICULTURE INTERNATIONAL SECURITIES TOTAL U.S.T .S. SECONDARY MARKET OTHER SEC. LIABILITIES TOTAL DOMESTIC DEPOSITS TOTAL FOREIGN DOMESTIC DEMAND TIME AND SAVINGS NOlI MMDA SAVINGS SMALL TIME LARGE TIME OTHER BORROWINGS EQUITY CAPITAL LOAN LOSS RESERVE LOAN COMMI TTMENTS LOANS SOLD ARIZONA CALIF. 36,095 HAWAII INCOME TOTAL INTEREST FEES & CHARGES 55,097 45,979 2,425 457 389 21 3.182 2,618 167 38,196 31,806 1,656 1,708 1,526 36 894 794 46 2,496 1,977 56 2,560 2,137 145 1,251 1,089 67 4,352 3,643 231 EXPENSES TOTAL INTEREST SALARIES LOAN LOSS PROVISION OTHER 47,950 25,490 8,630 3,887 9,944 374 196 84 15 79 3.309 1,533 620 369 788 33,149 17,825 6,017 2,664 6,643 1,394 883 257 25 228 754 451 117 21 164 2,074 857 201 402 614 2.138 1,174 427 137 400 1,099 612 168 73 246 3,660 1,958 739 181 782 7,095 2,449 4,799 83 20 63 -127 -51 -76 5,003 1,813 3,332 314 114 200 140 45 96 422 141 284 422 128 294 148 45 104 691 196 501 0.98 14.8 4.17 1.42 12.6 4.34 -.23 -3.3 3.31 0.98 15.4 4.11 1.16 19.0 3.71 1.14 17.1 4.08 2.06 24.6 8.13 1.26 17.5 4.14 0.88 13.1 4.05 1.27 17.9 4.28 708 243,406 8 2,568 38 18,954 429 158,981 10 7,703 22 4,818 18 6,378 50 14,509 39 6,506 94 22,989 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 (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. Ont6 VJ 'OJSPUI?J::I UI?S WLL xog 'O'd O)SI)UOJ:J UOS JO ~uo8 aAJaSa~ IOJapa:J ~uaw~Jodaa l.pJOaSa~ DEPOSITORY INSTITUTIONS REQUIRED TO HOLD RESERVES WITH THE FEDERAL RESERVE ON A WEEKLY BASIS PERCENT OF COMBINED MARKET TOTAL FOR FEBRUARY 1991, BY REGION DISTRICT ALASKA ARIZONA CALIF HAWAII IDAHO NEVADA OREGON UTAH WASH OEPOSIT TYPE CB SL CU C8 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 TOTAL DEPOSITS DEHAND 51 44 5 92 3 4 64 29 7 51 32 17 66 31 2 3364 3 4651 3 73 99 4 23 84 10 0 6 35 36 90 76 92 3 62 8 2 816 94 0 5 87 4 9 66 727 93 5 1 79 18 4 70 26 4 99 1 0 7814 8 6717 16 82 15 2 49 48 3 66 34 0 79 92 85 58 8 13 2 6 3 12 5 37 88 9 6 11 88 7 87 10 4 91 1 8 89 8 3 78 11 11 94 6 0 84 14 2 85 10 5 76 17 7 95 1 5 82 11 7 59 21 20 5 3 692B 92 3 73 25 5338 82 18 42 55 83 16 56 37 60 45 51 4 92 4 4 5935 6 4938 12 61 37 2 24 73 3 41 56 3 NOW SAVINGS MMDA SMALL TIME LARGE TIME = SAVINGS 1 6 5 4 83 65 29 5 84 11 5 13 10 79 11 10 n 92 B 5 3 65 45 68 42 49 23 12 20 35 30 2 54 4 49 1 & lOANS AND SAVINGS BANKS; CU = CREDIT UNIONS; MAY NOT SUM TO 100% DUE TO ROUNDING TYPE OF ACCOLNT OR LOAN DATE ARIZ MONEY MARKET OEPOSIT ACCOLNTS OEC90 JAN91 FEB91 6.04 DEC90 JAN91 FEB91 DEC90 JAN91 FEB91 CB = COMMERCIAL BANKS; SL 92 TO 182 OAYS CERTIFICATES 2-1/2 YEARS AND OVER CERTIFICATES COMMERCIAL, SHORT -TERM* COMMERCIAL, LONG- TERM* LOANS TO FARMERS* CONSUMER, AUTOMOBILE CONSUMER, PERSONAL CONSUMER, CRED IT CARDS AVE. AVE. AVE. AVE. AVE. AVE. RATE MAT. (DAYS) RATE MAT. (MONTHS) RATE MAT. (MONTHS) AVE. RATE AVE. RATE AVE. RATE US DISTRICT CALI F HAYA! I IDAHO OREGON UTAH WASH 5.89 5.66 5.54 5.81 5.62 5.38 6.21 5.89 5.69 5.47 5.40 5.29 5.96 5.86 5.70 5.97 5.66 5.50 5.95 5.66 5.66 5.88 5.58 5.48 7.19 6.82 6.44 6.73 6.42 6.50 7.07 6.04 6.01 5.68 6.75 6.29 6.39 6.16 5.90 6.92 6.68 6.00 6.51 6.33 6.12 6.97 6.58 6.04 6.80 6.64 6.38 7.52 7.31 7.04 7.27 6.97 6.73 7.01 6.51 6.27 7.43 7.14 6.86 7.44 7.19 6.99 7.48 7.43 6.82 6.93 6.95 6.87 7.43 7.13 6.81 7.35 7.15 6.98 8.43 64 9.34 45 10.43 10 9.09 135 9.53 8.89 168 9.80 43 9.06 4 9.33 86 9.58 10.02 228 NIA NIA 10.35 5 9.35 95 9.06 5 9.22 48 10.61 23 9.56 7 NIA 9.42 10 8.31 50 11.27 43 7.06 5 9.54 150 7.17 60 9.71 7 11.60 15.42 18.28 12.28 16.22 18.76 12.63 16.50 18.00 13.19 19.79 19.44 13.50 13.50 NIA 10.54 14.59 19.24 11.46 15.26 21.00 11.78 15.60 17.97 5.87 5.68 40 13 NIA NIA NIA NtA NIA N/" SOURCES: SURVEY OF TERMS OF BANK LENDING AND TERMS OF CONSUMER CREDIT; MOST COMMON INTEREST RATES ON SELECTED ACCOUNTS. * DATA ARE COMPOUNDED ANNUAL RATES.
@FedFRASER