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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