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FRBSF WEEKLY LETTER Number 92-04, January 24, 1992 Redlnk The California banking industry registered a dismal third quarter, as aggregate bank performance deteriorated under the pressure of rising asset quality problems. The industry, with almost $354 billion in assets, reported a net loss for the first time since 1987, when large banks had to build up loan loss reserves against problem loans to less developed countries. California bank performance weakened across all sizes of banks, as well as compared with industry performance nationally and elsewhere in the Twelfth District. In 1991 the poor performance of banks in California was due in part to mounting real estate asset quality problerns, especially construction and land development loans. However, noticeable increases in nonperforming business and consumer loans indicate that the recession has had a more general effect on bank earnings. months of 1991; in contrast, only 11.3 percent of banks nationally reported a net loss for the first three quarters of 1991. Outside of California, western banks generally continued to record healthy earnings and to show a ROA well above the level for the rest of the nation. Still, the recession has had an impact, as earnings fell slightly in the third quarter 1991 to $319 million from $348 million in 1990, and the ROA slipped to 0.79 percent from 0.94 percent. But, more importantly, outside of California asset quality indicators generally remained favorable. Another positive sign was the turnaround in Arizona, where banks reported modest earnings of $11 million for the third quarter, compared with a loss of $16 million in the same quarter in 1990. Asset quality Earnings Nationally, bank earnings for the third quarter were $4.3 billion, up from $3.6 billion in the same quarter in 1990, and return on assets (ROA) rose to 0.51 percent from 0.45 percent in the same period of 1990. All of the improvement, however, arose from the sales of securities and extraordinary gains, and not from net operating income. In contrast to the improvement at the national level, California banks as a group recorded a net loss of $75 million in the aggregate for the third quarter; in the same quarter a year ago, earnings were $859 million. The ROA for the banks in the state was -0.08 percent, compared with 1 percent in the third quarter in 1990. Earnings problems have not been limited to the larger banks in California. Performance has deteriorated across all size classes of banks, reflecting the breadth of the economic slump that has hit California. For example, 22 percent of the state's 480 banks reported a net loss for the first nine WESTERn BAnKinG Nationally, third quarter problem loan ratios were somewhat improved over the second quarter, largely because of the FDIC's resolution of the Bank of New England failure. (Problem loan ratios are defined here as loans past due30 days or more-plus nonaccrualloans divided by loans outstanding for all banks with more than $100 million in assets.) Still, at 6.25 percent at the end of the third quarter, the problem loan ratio is well in excess of its peak in 1983, the year following the last recession. See Chart 1. In California, the deterioration in loan quality is quite pronounced. As shown in the chart, recent increases in problem loans at California banks now place the state above the national ratio for total loans. In particular, the ratios for real estate loans for construction and land development and for business loans now exceed the national averages. The overall increase in problem real estate loans is significant, since 56 percent of California banks' total loans are secured by real estate, compared with 44 percent nationally. 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 Chart 1 Total Loans: Problem Loan Ratios ..+.. .. . .... Percent 19 " .... 8 •+ ~, .~.. ................ ........ . California +. '. Othe;.............. .. Twelfth \" ..... •••.....•• District \\ 7 ••••••• .. .+ •• 6 .. 5 r---,----.-~-r------,----,--..."...--.---,--__j 4 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 Year-end data except for 1991, which is third quarter data. Problem construction loans in the state have soared since the first quarter of 1991 when these data became available. As shown in Chart 2, nearly 20 percent of California banks' $23.1 billion in construction loans are either past due or on nonaccrual status, an increase of 5.6 percentage points in six months. Although problem construction loan ratios in the state are now 2 percentage points above the average for the U.S., they are still below the 26.4 percent level reported in New England. Furthermore, the surge in problem loans may have a more severe impact on California banks since they have a much higher proportion of construction loans to total loans than do banks nationally, about 10 percent versus 6 percent. Chart 2 Construction Loans: Problem Loan Ratios, 1991 Percent 20 15 10 Deterioration in commercial real estate markets is another development affecting California lenders. From the first quarter to the third quarter, problem commercial real estate loans in California have risen over 1 percentage point, to 8.3 percent. Despite that increase, the California ratio was still below the national average of 8.7 percent. Prosoects of oersistent Droblems in commf>rcirll real ~state will only pr~long pressure on b~nk~' asset quality. Moreover, both nationally and in California, banks reported increased exposure to commercial real estate lending in the third quarter. This is consistent with reports from large banks that many borrowers are not able to find permanent lenders for maturing construction loans and "mini-perm" construction loans. Miniperms, with maturities of up to eight years, became prevalent in the mid-1980s as a way of financing income properties. Thus, the increase in commercial real estate loans may reflect the reluctance of other lenders to supply long-term credit, rather than a signal that there has been a pickup in loan demand at banks. The overall weakness in the economy and employment in California also are having an adverse impact on the quality of business and consumer lending. In the state the problem business loan ratio for the third quarter has climbed to nearly 8 percent, up almost 2V2 percentage points from September 1990, and nearly 2 percentage points above the national average. California banks' problem consumer loan ratio also has increased, level. although it remains below the u.s. Capital positions While California banks as a group have a slightly higher loan loss reserve ratio than do banks nationally, that cushion has been offset by losses in 1991 that have actually lowered California banks' overall ratio of equity to assets to 6.17 percent, below the national level of 6.70 percent. Moreover, chargeoffs by California banks have lagged behind chargeoff rates nationally. Thus, softness in California real estate markets, where California banks do most of their real estate lending, combined with a sharp upturn in problem loan ratios, suggests that California banks may find themselves facing additional pressure to charge off problem loans and to add to loan loss reserves. 5 01 I U.S. Banks 02 • California Banks o 03 121 Other Twelfth District Banks Gary C. Zimmerman Economist REGIONAL BANK DATA SEPTEMBER 30, 1991 (NOT SEASONALLY ADJUSTED, PRELIMINARY DATA) DISTRICT ALASKA -------- ---_ .... ARIZONA -----_.- CALIF. HAl/AIl IDAHO NEVADA OREGON UTAH I/ASH. .--.---- -------- ASSETS TOTAL FOREIGN DOMESTIC 515,673 36,425 479,247 4,622 0 4,621 35,344 N/A 35,344 353,709 34,392 319,318 20,060 1,835 18,225 9,442 N/A 9,442 13,027 N/A 13,027 25,713 9 25,704 13,552 92 13,460 40,203 98 40,105 LOANS TOTAL FOREIGN DOMESTIC REAL ESTATE COMMERCIAL CONSUMER AGRICULTURE INTERNATIONAL 365,795 2,057 23,178 257,091 12,775 6,442 8,757 31,596 334,199 168,999 75,783 56,720 5,975 142 5 2,052 705 310 6 N/A N/A 23,178 7,384 3,064 5,131 426 8 30,116 226,975 127,078 52,226 31,167 2,914 133 1,374 11,401 6,470 2,914 1,254 20 1 N/A 6,442 2,015 1,463 1,749 818 N/A N/A 8,757 2,620 1,174 4,297 N/A 17,106 8 17,098 6,405 4,998 3,462 469 N/A 8,486 N/A 8,486 3,135 1,699 2,946 156 N/A 29,903 93 29,810 13,028 7,541 6,405 1,150 0 50,756 16,159 22,941 11,656 1,881 922 486 473 4,587 1,468 2,238 881 27,012 8,556 12,780 5,676 4,052 1,534 1,711 807 1,766 440 843 483 1,959 799 626 534 3,279 736 1,597 945 2,649 519 1,445 685 3,572 1,186 1,213 1,172 LIABILITIES TOTAL DOMESTIC 481,551 445,126 4,076 4,075 32,790 32,790 331,847 297,455 18,685 16,850 8,790 8,790 11,971 11,971 23,675 23,666 12,460 12,368 37,25B 37,160 DEPOSITS 415,271 34,914 380,358 81,309 299,048 37,496 81,962 36,814 89,843 3,530 0 3,530 1,052 2,478 297 471 482 649 30,284 N/A 30,284 4,734 25,550 2,860 6,490 2,301 11,787 284,122 32,965 251,156 56,826 194,330 23,574 57,025 24,518 50,755 16,406 1,680 14,726 2,196 12,530 1,363 2,203 1,937 2,365 8,965 N/A 8,965 2,138 6,827 1,013 2,145 1,259 1,322 20,521 38 20,483 3,774 16,709 2,643 3,965 1,702 6,999 ...... , .. v ... 55? 2,099 38,235 4,662 1,085 ',362 10,554 92 10,462 1,851 8,611 1,285 1,819 969 3,593 935 33,427 139 33,288 7,545 25,743 3,583 6,654 3,106 9,426 ... , ...n;;. 7,463 N/A 7,463 1,192 6,271 878 1,189 540 2,947 710 OTHER BORROI/INGS EQUITY CAPITAL LOAN LOSS RESERVE 44,114 34,122 9,482 495 546 40 1,871 2,555 584 29,442 21,863 7,203 1,740 1,375 198 1,237 652 94 2,272 1,056 286 2,556 2,038 400 1,697 1,092 206 2,804 2,945 471 LOAN COMM I TMENTS LOANS SOLO 195,444 29,984 534 34 18,521 184 135,149 28,915 6,264 169 2,206 35 1,897 71 9,546 244 5,762 30 15,565 302 LOAN LOSS RESERVE (ALL BANKS) NET CHARGEOFFS, TOTAL REAL ESTATE COMMERCIAL CONSUMER AGR I CULTURE 2.59 1.24 0.55 1.31 2.82 0.40 1.95 0.06 0.03 -0.11 0.55 N/A 2.52 1.50 2.12 2.67 1.80 3.02 2.80 1.30 0.53 1.31 3.28 0.18 1.55 0.11 0.01 0.05 0.70 2.17 1.45 0.39 0.05 0.85 0.66 0.02 3.27 3.95 0.21 5.64 6.05 -0.08 2.34 1.15 0.73 1.84 1.40 0.10 2.43 1.42 0.59 2.17 2.46 0.06 1.58 0.50 0.25 0.38 1. 16 0.29 PAST DUE & NON-ACCRUAL, TOTAL REAL ESTATE COMMERCIAL CONSUMER AGR I CULTURE 6.05 6.99 7.23 3.32 4.09 3.30 3.55 3.36 2.74 0.36 4.76 8.90 9.81 2.49 7.46 6.90 7.56 7.94 3.77 5.25 2.43 2.04 3.52 2.33 7.11 2.03 2.47 2.56 1.70 1.57 6.28 6.62 11.63 5.56 0.50 4.01 4.72 4.62 1.56 1.42 4.25 6.32 4.37 2.79 1.78 4.01 5.28 4.13 1.94 2.44 SECURITIES TOTAL U.S. T.S. SECONDARY HARKET OTHER SEC. TOTAL FOREIGN DOMESTIC DEMANO TIME AND SAVINGS NOlI MMDA SAVINGS SMALL TIME LARGE TIME 866 17 2,862 INCOME TOTAL INTEREST FEES & CHARGES 40,871 34,021 2,010 337 286 17 2,567 2,071 140 28,022 23,353 1,358 1,403 1,262 29 713 628 39 1,541 1,231 47 2,021 1,651 127 1,106 938 56 3,161 2,603 198 EXPENSES TOTAL INTEREST SALARIES LOAN LOSS PROVISION OTHER 37,501 17,553 6,831 4,689 8,428 264 128 68 6 63 2,530 1,189 492 200 650 26,127 12,168 4,720 3,618 5,621 1,142 694 221 30 197 598 342 93 22 141 1,413 433 163 301 516 1,831 828 366 271 367 976 477 145 104 249 2,620 1,294 563 139 624 3,349 1,296 2,050 73 21 52 36 6 31 1,877 836 1,036 260 94 167 115 39 76 128 39 89 189 49 140 131 40 91 540 172 369 0.54 8.01 4.31 1.55 12.75 4.69 0.12 1.60 3.39 0.39 6.32 4.26 1.13 16.17 3.84 1.07 15.45 4.05 0.91 11.22 8.20 0.74 9.18 4.34 0.91 11.05 4.62 1.26 16.69 4.47 791 242,183 8 2,680 40 19,227 480 154,886 21 8,357 23 4,970 19 6,435 51 15,882 54 7,133 Y5 22,613 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 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. @~ OU176 v::> 'o:JsPUPJ:I UPS lOLL x09 ·O·d O)SI)UOJj UOS JO al\JaSa~ ~U08 IOJapaj ~uaw~Jodaa 4)JOaSa~ DEPOSITORY INSTITUTIONS REQUIRED TO HOLD RESERVES IIITH THE FEDERAL RESERVE ON A IIEEKLY BASIS (PERCENT OF COMBINED MARKET TOTAL FOR NOVEMBER 1991, BY REGION) DISTRICT ALASKA DEPOS IT TYPE CB SL CU TOTAL DEPOSITS DEMAND NOli SAVINGS & MMDA SMALL TIME LARGE TIME 54 91 65 60 34 50 CB = COMMERCIAL 41 4 28 32 62 45 5 5 7 7 3 5 BANKS; SL ARIZONA CALIF CB SL CU CB SL CU CB SL CU 72 99 58 54 75 93 93 96 90 90 95 93 4848 90 5 6034 56 38 25 72 45 50 424 0 1 636 4 42 8 16 4 3 = SAVINGS TYPE OF ACCOUNT OR LOAN 1 7 0 4 0 10 0 10 1 4 1 6 4 5 6 5 3 5 IDAHO NEVADA OREGON CB SL CU CB SL CU CB SL CU CB SL CU CB SL CU CB SL CU 6828 90 3 6928 63 29 43 53 83 16 91 91 94 93 89 91 81 95 84 78 76 84 78 8 13 90 4 6 84413 72 6 22 77 15 8 76 10 14 56 36 8 91 6 3 652411 59 25 17 42 54 4 49 50 2 HAIiAIl 5 7 3 7 4 2 & LOANS AND SAVINGS BANKS; CU DATE 4 0 9 3 3 3 9 3 2 5 4 = CREDIT 71 26 99 1 7915 81 15 43 55 6634 3 0 6 4 3 0 11 8 1 4 8 8 10 12 18 6 10 6 IIASH UNIONS; MAY NOT SUM TO 100% DUE TO ROUNDING DISTRICT ARIZ CALI F HAllA I I IDAHO OREGON UTAH IIASH SAVINGS ACCOUNTS AND MMDAS"" SEP91 OCT91 NOV91 5.03 4.87 4.63 NA 4.94 4.68 NA 4.75 4.46 NA 4.87 4.65 NA 5.27 4.90 NA 5.07 4.86 NA 4.62 4.28 NA 5.11 4.90 NA 4.81 4.65 92 TO 182 DAYS CERTIFICATES SEP91 OCT91 NOV91 5.44 5.22 4.89 5.35 5.14 4.76 5.19 4.84 4.45 5.43 5.17 4.81 5.27 5.15 4.84 5.35 5.08 4.80 5.35 5.10 4.69 5.39 5.23 4.91 5.52 5.38 4.90 2-1/2 YEARS AND OVER CERTI FICATES SEP91 OCT91 NOV91 6.58 6.29 5.96 6.34 6.08 5.71 6.14 5.68 5.31 6.43 6.16 5.78 6.67 6.42 6.00 6.73 6.31 6.00 6.47 6.27 5.92 6.36 6.02 5.73 6.32 6.12 5.74 6.81 54 7.81 44 9.08 8 7.93 140 8.93 24 7.97 8 8.41 224 N/A N/A 8.11 N/A 7.63 188 8.91 21 7.77 8 8.88 110 8.40 15 N/A N/A 9.18 254 N/A N/A 9.28 17 8.09 76 N/A N/A 8.80 6 7.11 50 9.55 51 6.34 7 8.71 332 N/A N/A 8.74 8 10.61 14.88 18.19 10.77 14.29 18.41 13.00 15.00 18.00 10.90 17.70 18.82 N/A N/A N/A 11.00 11.00 N/A 10.50 12.88 19.25 10.45 15.01 21.00 9.46 12.25 17.93 ------------------------------------------- COMMERCIAL, SHORT - TERM* COMMERCIAL, LONG-TERM" LOANS TO FARMERS" CONSUMER, AUTOMOB I LE CONSUMER, PERSONAL CONSUMER, CRED I T CARDS -- AVG. AVG. AVG. AVG. AVG. AVG. --- ---------------------------------._-.------. ------- -- .---------- ---------------- RATE MAT. (DAYS) RATE MAT. (MONTHS) RATE MAT. (MONTHS) AVG. RATE AVG. RATE AVG. RATE US 5 UTAH ----.--.---------- ---.----------------------------------------------------------- --.---------- ---------.--.- --------------SOURCES: SURVEY OF TERMS OF BANK LEND I NG AND TERMS OF CONSUMER CRED IT; MOST COMMON INTEREST RATES ON SELECTED ACCOUNTS. * DATA ARE COMPOUNDED ANNUAL RATES. *" SAVINGS AND MMDAS COMBINED AS OF OCTOBER 1991.
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