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FRBSF . WEEKLY LETTER . Number 92-37, October 23, 1992 Southern California Banking Blues The banking industry's performance historically has been closely related to the condition of the economy. This certainly has been true during the most recent recession in California. Since the downturn in the state's economy after mid-year 1990, problem loan ratios have risen sharply and bank earnings have deteriorated. Within the state, the economic strains have not been evenly distributed. As pointed out in the Letter of August 21, 1992, the impact of the recession has been more severe in Southern California. As a result, the smaller community banks operating there generally have faced a much harsher economic climate than either community banks elsewhere in the state or the larger banks that operate throughout the state. This Letter illustrates the uneven impact of the recession within California by comparing the performance of the community banks operating in Southern California with community banks in two other key regions of the state, the Central Valley and the San Francisco Bay Area. The California economy The California economy continues to struggle, burdened by the sluggish national recovery, ongoing defense cutbacks, and soft real estate markets. Employment in the state has declined by 650,000 jobs since the mid-year 1990 cyclical peak. This huge loss of jobs is a major reason why California's September unemployment rate stood at 9.4 percent, far above the average of 7.5 percent. u.s. The severity of the economic downturn in California is reflected in the performance of the state's banks. After large losses in the last half of 1991, aggregate earnings for the state's banks were positive during the first half of 1992, with return on assets (ROA) climbing to 0.54 percent; but bank performance still lagged far behind the improvement at the national level. ROA for the nation rose WESTERn BAnKinG to 0.92 percent for the first half of the year. Nationally, only 6.4 percent of U.S. banks reported losses for the first half of 1992, while in California 24 percent of the banks reported losses. Moreover, asset quality, measured by the ratio of problem loans to total loans, registered significant improvement almost everywhere except California. Southern California suffers Much of the slowdown in the California economy has taken place in Southern California. Together six major Southern California counties have lost over 520,000 jobs since the peak in employment in May 1990, accounting for most of the state's job loss. Commercial real estate markets in California also have been hit hard by the aftermath ofthe 1980s building boom. As with the employment figures, the commercial real estate situation appears to be worse in Southern California than in other subregions. According to Coldwell Banker, as of June 1992, vacancy rates for commercial office space in metropolitan areas were near or above the national average of 19.4 percent in each of the Southern California markets. In the Central Valley, only Bakersfield exceeded the U.S. average, while vacancy rates in all the San Francisco Bay Area markets were well below the U.S. average. Local economies and community banks Given the severity of the recession in Southern Cal ifornia, the exposure of community banks to local economic conditions is particularly important. In contrast to the larger banks, which often have statewide branching networks, the smaller community banks have only limited ability to diversify beyond their local communities. Thus, community banks generally find their fortunes more closely related to the economic vitality of regions of the state where they are located. As of June 1992, 386 of the state's 459 banks fit the description of community banks, defined here as institutions with assets of less than $300 million. Western Banking is a quarterly review of banking developments in the Twelfth Federal Reserve District. It is publ ished in the Weekly Letter on the fourth Friday of January, April,July, and October. FRBSF Chart 1 Problem Real Estate Loan Ratio for Community Banks Percent 8 7 Analysis of aggregate data by subregion for community-oriented California banks allows us to examine variations in banking conditions in three major areas of the state. The first subregion is Southern California (Los Angeles, Orange, Riverside, San Bernardino, San Diego, and Ventura Counties), with 222 community banks; the second is the San Francisco Bay Area (Alameda, Contra Costa, Marin, San Francisco, San Mateo, Santa Clara, Solano, Sonoma, and Napa Counties), with 74 community banks; the third is the Central Valley (Fresno, Kern, Sacramento, and San Joaquin Counties), with 31 community banks. Problem loans and earnings Two measures of industry performance are examined: problem real estate loan ratios and return on assets. As California's economy has deteriorated over the past two years, problem real estate loan ratios (defined here as all loans 30 days or more past due plus loans no longer accruing interest divided by outstanding loans) have risen sharply. Problem loan ratios for construction and commercial real estate lending have soared as office and commercial vacancy rates have climbed, rents have fallen, and cash flows have been squeezed. These problems are especially noteworthy since 38 percent of community banks' total loans are for construction and commercial real estate. The comparable ratio for all California banks is only 25 percent. 6 Central Valley ~ ~; ~~, .••••.•••••,•••/ \.';.,... Return on assets data shown in Chart 2 for the three California subregions emphasize the deterioration of community bank performance in Southern California from prerecession levels. For example, ROA for the first halfof1992 wasadismal 0.26 percent for Southern California community banks, compared to 0.61 percent for Northern California and 0.71 percent for the Central Valley. Moreover, the share of banks losing money in the first half, at 28 percent in Southern California, 4 .'" •• ••••••• *:?:. ••\" ::••......:.:',.. ••..••.....// / ,., -'" "" ....,.,..," .,. ,'" " 3 2 ...... 'N~rthern'" .-..... ;',.1,:",,,,,,,, 1 California o 1988 1989 1990 1991 1992 Chart 2 Return on Assets for Community Banks Percent r 1.6 oCentral Valley ~ 1.4 ! Northern California ~ 1.2 • Southern California 1.0 0.8 0.6 0.4 0.2 1989 The worst deterioration in real estate loan quality in the three subregions has taken place at Southern California community banks. As shown in Chart 1, the ratio of problem real estate loans at community banks in Southern California has been above 7 percent for the last three quarters, and at mid-year it was more than double the ratio for the Central Valley. Moreover, asset quality problems extend beyond real estate lending, as problem loan ratios for total, business, and consumer installment loans also are the highest in Southern California. 5 .. 1990 1991 First Half of Year ----'---+ 0.0 1992 also was higher than the comparable figures for the San Francisco Bay Area (23 percent) and the Central Valley (10 percent). Outlook remains variable and cloudy Asset quality and earnings for community banks show a pattern of deterioration that is consistent with the weakness in the California economy over the last two years. Southern Cal ifornia's community banks have experienced more loan quality problems and have suffered more earnings deterioration than have community banks in the other subregions. Furthermore, the continued problems in commercial real estate lending and prospects for an "overhang" of office space until the end of the decade, as some analysts have suggested, argue against a quick improvement in the important Southern California banking market. Gary C. Zimmerman Economist REGIONAL BANK DATA JUNE 30, 1992 (NOT SEASONALLY ADJUSTED, PRELIMINARY DATA) DISTRICT ALASKA LOANS TOTAL FOREIGN (RESIDUAl) DOMESTIC FiEALESTATE COMMERCIAL CONSUMER AGRICULTURE INTERNATIONAL 347.006 29,223 317.763 167,913 66,107 2.oll'3 3 2,090 69'i 716 ARIZ. CALIF. HAWAII 13_ 1,345 12.oll'3 IDAHO NEVADA 6.854 0 6,854 2,058 1,529 1,616 9,135 0 9,135 2,679 17,_ 0 17,996 666 5.1n 604 15 0 4.637 3,611 491 0 2,366 1,266 655 3,827 1,112 1,625 565 1.nl 423 845 503 445 19;114 0 19,414 239;174 27,824 211,650 7.ifi 124,994 6,912 2,596 5,375 372 7 43,314 29,457 2,941 84 3,190 1.150 44 0 33,332 9,975 17,n5 4,260 2.030 1,644 5,562 56.713 5,965 92 336 61,296 20,020 29,862 11,394 1_ 619 505 6.734 2,272 3,590 871 464,176 435,164 3,963 3,963 32,347 32,347 312,364 265,515 19,816 17,626 6,971 8.971 403,741 29,849 0 29,649 5,573 24,275 3,166 274,304 25,228 15,579 1,787 13,791 7,494 0 7,494 1,291 8,203 39,127 3,420 0 3,419 973 2,446 302 518 609 512 475 OTHER BORROWINGS EQUITY CAPITAL LOAN LOSS RESERVE 38_ 37_ 520 801 10,457 41 LOAN COMMITTMENTS LOANS SOLD 188.939 27,591 602 6 SECURITIES TOTAL U.S.T.S, SECONDARY MARKET OTHER SEC. LIABILITIES TOTAL DOMESTIC DEPOSITS TOTAL FOREIGN (RESIDUAL) DOMESTIC DEMAND TIME AND SAVINGS NOW MMDA SAVINGS SMALL TIME LARGE TIME 27,874 375,868 66,736 289,130 39,407 91,276 41,622 n,251 AL INTEREST FEES & CHARGES EXPENSES TOTAL INTEREST SALARIES LOAN LOSS PROVISION OTHER INCOME BEFORE TAXES TAXES NETINCOME ROA{%) ROE{%) NET INTEREST MARGIN (%) NET CHARGEOFFS. TOTAL REAL ESTATE COMMERCiAL CONSUMER AGRICULTURE PAST DUE & NON·ACCRUAL, TOTAL REAL ESTATE CONSTRUCTION COMMERCIAL FARM 1-4 FAMILY REV 1-4FAMILY OTHER MULTI·FAMILY COMMERCIAL CONSUMER AGRICULTURE NUMBER OF BANKS NUMBER OF EMPLOYEES 6 0 570 OREGON 0 6.866 UTAH WASH. 6,760 0 6,760 3,309 1.676 3,176 154 0 30,G16 51 29,965 3.135 3.957 1,_ 636 12,929 7,579 6.615 .1.136 0 1,229 690 1,749 751 12,974 12,974 23,496 23,496 12,850 12,743 37,376 37,311 19,972 0 19,972 3,859 16,112 2,950 4,156 1,943 6,094 10,457 33,462 751 32,711 927 ns 3,469 8.043 2,224 2,602 3.420 625 ',262 9,210 187,967 24,216 93,893 26,652 44,465 28.530 2,807 2,162 3,119 2,495 1,ffl9 592 9,197 0 9,197 2,246 6,950 1,143 2,321 1,536 1,132 816 1,995 2.951 3,665 1.512 221 1,378 706 100 2,929 1.481 369 2,872 2.239 562 20.131 23.452 7,_ 467 2,189 1.199 217 19,206 156 126,203 23,715 5.909 2,480 1,796 9,446 6,817 16,480 225 25 40 '" 3,140 1,251 472 288 751 166 88 152 3.878 982 365 258 74 284 574 240 100 56 178 1,410 395 706 379 158 31 138 348 96 13,473 4,966 2,915 1,714 53 1,595 706 192 88 30 59 130 43 87 337 111 122 288 96 190 253 69 878 0.54 7,47 1.16 16.18 4.02 1,22 16.52 4.34 2.59 25.68 7.94 1.37 14.96 128 14.59 4.88 1.17 13.24 4.34 0.37 3.18 0.50 0.73 0.16 1.17 1.58 0.98 0.32 0.94 0.49 0.36 7,832 2,568 249,076 61,110 2,210 11,581 1,494 927 ',997 1,422 n6 = 106 10,359 1,934 8,425 1,393 1,851 1,273 3,138 7,540 25,171 3,_ 7,_ 172 11 19,647 7,388 4,248 2,241 152 60 5,no 46 5 42 2,993 1,166 1,607 57 17 40 27 39 0.75 1.78 13.31 4.97 2.62 3.62 9.62 4,40 1.04 0.59 0.98 3.14 0.09 6.19 7.75 18.58 8.15 8.03 1.13 2.74 7.93 6.70 328 5.56 756 243.154 0,29 0.05 0.58 025 0,38 125 1.11 3.23 1.66 0.00 0.14 4.43 5,47 11.39 6.04 0.00 0.61 4.55 1.11 0,22 0.69 0.99 4.07 -0.13 0.07 0.31 2.15 2.39 7.36 1,24 7.05 724 8.60 22,29 19.52 10.84 9.43 8.36 124 2.97 8.56 7.68 3.90 8.72 29,49 2.13 128 3.96 2,45 0.66 2.65 12.90 8.99 2,41 0.00 6.99 8 2,632 4.30 38 19,514 459 157,142 0.90 0.00 10.94 0.89 2.23 0.69 2.15 2.07 1,44 19 8,312 188 61 19 100 0.03 0.58 0.57 0.56 ~07 2,49 6.55 324 5.65 021 125 1.53 2.17 1,41 3,22 20 4,791 343 5.14 0.00 85 167 4.n 0.12 5.89 7.38 13.96 6.58 0.00 0.58 3.39 31.74 7.97 5.14 1,31 3,85 5.02 12,44 18 5,935 49 15,571 5.n 1.67 0.64 1,49 7.90 4.71 1.50 4,44 1.92 1.33 551 334 94 431 226 0.07 0.59 1.13 0.23 2.97 3.68 3.14 4.54 9.88 0.88 2.09 4.23 6.93 19.81 4.00 0.75 3.13 3.92 3.42 1.93 4.34 54 7,108 91 22,149 3.59 2.07 2.70 0.78 1.70 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 wilh soybean inks. @~ OUt6 V:l 'OJSpueJ:l ueS WLL xog 'O'd O)SI)UOJ:J UOS JO ~uo8 aAJaSa~ IOJapa:J ~uaw~Jodaa l.pJOaSa~ PERCENT OF COMBINED MARKET TOTAL FOR AUGUST 1992, BY REGION D1SmtCT DEPOSIT TYPE CB SL CU 54 40 TOTAL DEPOSITS DEMAND NOW SAVINGS & MMDAS SMALLTIME LARGE TIME CB ALASKA 91 4 CB 72 98 64 28 60 32 33 64 60 56 47 45 94 75 =COMMERCIAL BANKS; ARIZONA SL CU CB SL CU 4 24 0 2 6 34 4 40 9 17 2 4 92 96 89 90 95 94 0 7 4 0 0 11 0 10 1 5 0 6 ~ CB SL CU 4ll 4S 90 5 58 35 56 38 24 73 41 50 5 5 6 6 3 9 HAWAII CB f57 89 IDAHO SL CU 27 4 f57 30 60 32 50 47 82 15 CB 5 92 95 0 94 3 93 4 89 10 89 6 6 7 3 8 3 4 NEVADA SL CU 3 5 3 3 1 5 SL • SAVINGS & LOANS AND SAVING BANKS; CU _ CREDIT UNIONS; OREGON CB SL CU 73 3 0 6 4 3 0 24 97 3 78 18 82 14 42 65 62 38 CB UTAH SL CU CB 80 11 9 94 1 5 84 8 8 76 11 13 78 76 75 18 12 8 13 89 83 71 78 72 WASH SL CU 8 4 4 6 15 10 CB 14 6 13 SL CU 56 35 9 90 6 4 64 24 12 51 26 17 4 39 56 23 7 17 49 49 2 MAY NOT SUM TO 100'1', DUE TO ROUNDING TVPEOFACCOUNTORLOAN DATE SAVINGS ACCOUNTS AND MMDAS"" JUN92 JUL92 AUG 92 3,53 3.24 3.14 3,66 3.36 3.28 3,23 2.96 2.83 3,52 3.14 3.08 3,90 3.54 3.40 4,03 3.77 3.69 3,43 3.16 3.14 3.79 3.55 3.42 3.63 3,43 3.39 92 TO 182 DAYS CERTIFICAIES JUN92 JUL92 AUG 92 3.78 3.45 3.36 3.74 3.40 3.34 3.40 3.08 3.03 3.55 3.26 3.23 4.05 3.17 3.17 3.80 3.56 3.39 3.55 3.37 3.37 3.91 3.64 3.55 3.97 3,68 3.58 2-1/2 YEARS AND OVER CERTIFICATES JUN92 JUL92 AUG 92 5.39 5.02 4.87 5.16 4.78 4.75 4.47 4.32 4.40 4.95 4.52 4.29 5.63 4.78 4.78 5.81 5.56 5.41 5.03 4.97 5.05 5.42 5.03 4,94 5.43 4.79 4,75 5.13 6.50 45 8.31 17 6.16 90 7.73 32 6.76 16 7.14 183 7.92 25 6.81 7 6.03 172 8.25 26 6.73 16 6.77 102 N/A N/A N/A N/A N/A N/A N/A N/A 7.78 N/A 6.40 137 N/A N/A 6.47 18 4.12 18 8.75 8.17 61 6.17 32 N/A N/A 7.14 11 9.15 13.94 17.66 9.39 13.77 18.36 9.90 13.75 18.00 9,24 13,77 18.98 N/A N/A N/A 10.50 11.00 N/A 8.79 12.26 19.25 8,50 16,00 21.00 9.41 12.81 17.93 COMMERCIAL, SHORT TERM" COMMERCIAL, LONG-TERM" LOANS TO FARMERS" CONSUMER, AUTOMOBILE CONSUMER, PERSONAL CONSUMER, CREDIT CARDS AVG. RATE AVG, MAT. (DAYS) AVG. RATE AVG. MAT. (MONTHS) AVG,RATE AVG. MAT. (MONTlHS) AVG. RATE AVG. RATE AVG. RATE US DISTRICT 59 ARIZ CAUF HAWAII IDAHO OREGON UTAH 53 SOURCES, SURVEY OF TERMS OF BANK LENDING AND TERMS OF CONSUMER CREDIT; MOST COMMON INTEREST RATES ON SELECTED ACCOUNTS. " DATA ARE COMPOUNDED ANNUAL RATES. ""SAVINGS AND MMDAS COMBINED AS OF JULY 1992 WASH