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FRBSF
WEEKLY LETTER
Number 93-03, January 22, 1993
u.s. Banking Turnaround
A favorable interest rate envi ronment and improved
asset quality in 1992 combined to produce three
consecutive record quarters of earnings for the
nation's 11,590 commercial banks. The good news
also has helped fuel a run-up in bank stock prices.
The turnaround in bank earnings nationally has
been dramatic, and far more robustthan the recovery experienced by the
economy. After-tax
profitsof$24.1 billion overthe firstthree quarters of
1992 pushed return on assets (ROA) at commercial
banks to 0.94 percent (annual rate), an excellent
level for the industry.The 1992 performance of
banks contrasts sharply with that of 1991, when they
were heavily burdened by problem loans and ROA
was a moderate 0.59 percent.
u.s.
Furthermore, the turnaround has been widespread.
The percentage of banks reportinglossesduringthe
first three quarters fell from 11.4 percent in 1991 to
6.5 percent in 1992. All regions of the country and
all sizes of banks reported improved earnings,
although ban.k performance in California continues
to lag behind the recovery nationally.
The improved earnings were reflected in bank stock
prices, which outperformed the overall market in
1992. The Salomon Brothers 50-bank stock index,
for example, rose 29 percent last year, compared
to the 4.4 percent increase in the S&P 500.
of 1992 alone, banks reduced their expenses for
building loan loss provisions by $2.2 billion;
for the first three quarters of 1992 these expenses
were down by $4.3 billion from the prior year.
The steeply upward-sloping yield curve did even
more for bank earnings by increasing net interest
margins, the difference between the yield on assets and the cost of funding those assets. Wider
margins have occurred as reductions in interest
expenses for deposits and borrowings in 1992
exceeded declines in interest revenl)es on loans
and securities and as banks relied more heavily
on equity for funding.
The increase of 24 basis points in net interest
banks in 1992 boosted industry
margin for
earnings by around $3 billion in the third quarter
alone, and by over $8 billion for the first three
quarters of 1992, with both large and small
banks reporting wider margins.
u.s.
Strong earnings and issuance of new equities
have been key ingredients in the industry's efforts
to build up capital positions. At the end of the
third quarter of last year, equity-to-asset ratios for
U.S. banks stood at 7.39 percent. That represents
a 0.69 percentage point increase from a year ago.
This increase in overall bank capital, along with
higher asset quality, marks a real improvement in
the condition of the banking industry.
Asset quality improves
One factor contributing to the turnaround in bank
earnings has been the reduction in troubled loans.
The past due (30daysor more) and nonaccrualloan
ratio for
banks as a group began to come down
in early 1991, and showed much improvement
in 1992. The decline in the ratio reflects better
asset quality in virtually all loan categories.
u.s.
Improved asset quality boosted earnings, as banks
were able to reduce their contributions to provisions for loan loss reserves. In the third quarter
WESTERn BAnKinG
California still lagging
In California aggregate bank performance also
improved significantly in 1992, following losses in
the third and fourth quarters of 1991. However, the
performance of California banks still lags well
beh ind that of the rest ofthe ind ustry. The aggregate
ROA figure for California banks was 0.60 percent for
the first three quarters of 1992, up from a dismal
0.39 percent in 1991. In the first three quarters of
1992, 29 percent of the state's banks lost money,
compared to only 6.5 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
In California the performance of small banks
(under $300 million in assets) deteriorated noticeably, as profitability fell in the third quarter of
1992. The problems were worse in the Southern
California region, where small banks as a group
actually lost money in the third quarter.
California banks' most stubborn problem continues to be real estate loans. As shown in Chart 1,
at the end of the third quarter of 1992 California
banks' problem loan ratio for commercial real
estate and construction loans was 14.8 percent,
compared to the 10.4 percent for the nation. Despite the improvement at the national level, loan
quality for commercial real estate loans in California was still deteriorating.
Chart 1
Problem loan Ratio for Combined
Commercial and Construction
Real Estate loans
'"....
/
/
/
/
....
Percent
,,-,,-
,,-
California
r 15
~
where, first in Texas and then in New England.
Still, until a rebound is firmly underway in the
California economy, it seems unlikely that the
state's banks will experience the significant
improvement in asset quality that they need to
match the national performance of the industry.
In addition to more severe asset quality problems
in California, the state's banks have not had the
same widening in net interest margins experienced by banks nationally. As is shown in Chart 2,
unlike banks nationally, California banks' net
interest margins widened slightly in 1992. California banks' average yield on assets appears to
have fallen more sharply than was the case elsewhere in the nation. Several factors likely contributed to the decline in California, including a larger
portfolio shift from loans into lower-yielding securities than by banks nationally, and increases
in the relative importance of problem loans that
are not accruing interest.
Chart 2
Change in Net Interest Margin
Basis Points
35
(Using 1991 Q1 as the base period)
30
14
25
13
20
15
/
/
12
I
/
/
I
11
/
/
I
10
9
Within the commercial real estate loan category,
problem construction loan ratios have risen
nearly 900 basis points (nine percentage points)
in California and problem commercial real estate
loans have climbed by 300 basis points since the
first quarter of 1991. In contrast, for U.S. banks as
a group, problem construction and commercial
real estate loan ratios have fallen by 130 and 146
basis points, respectively, as asset qual ity has
improved. Moreover, California banks have a
relatively high proportion of construction and
commercial real estate loans in their loan portfolio, 24.8 percent of total domestic loans,
compared to an 18.6 percent figure nationally.
looking ahead
Continued high vacancy and foreclosure rates
in California indicate that the commercial real
estate problems with real estate loans will take
time to resolve. The silver lining is that problem
loan ratios for the state remain well below the
levels that devastated the banking industry else-
....
.... I
",
10
California
,
'
5
o
-5
Nevertheless, California banks have been able
to rebuild their capital positions. As with banks
nationally this has been accomplished in part
through retained earnings and raising new equity.
But California banks as a group also improved their
capital positions by reducing assets. In the first
three quarters of 1992, California bank assets fell at
a 3.9 percent annual rate, while nationally bank
assets expanded at a 1.8 percent annual rate.
The combination of a smaller asset base and
large increases in equity helped boost California
banks' equity-to-assets ratio to 7.42 percent.
Thus, California banks now slightly exceed the
national average, which is the highest aggregate
equity-to-assets ratio for the industry since the
1960s. This significant change in capital positions
at California banks gives a strong signal that the
state's banks are making progress despite lingering asset quality problems.
Gary C. Zimmerman
Economist
REGIONAL BANK DATA
8EPTI!MBER 30. 1 _
(NOT SEASONAllY ADJUSTED, PRELIMINARY DATA)
DISTRICT
ALASKA
ARIZ.
• _ . __ • ____ . _ ._ _ _ _ _ _ _ _ _ _ _ _ _ _ _
FOREIGN {RESIDUAL;
DOMESTIC
LOANS
TOTAL
FOREIGN (RESIDUAL)
DOMESTIC
REAL ESTATE
COMMERCIAL
CONSUMER
AGRICULTURE
INTERNATIONAL
SECURITIES
TOTAL
CALIF.
V,759
29.789
IDAHO
NEVADA
OREGON
WASH.
UTAH
• ____________• • • • ___ • • • • • • • _ _ _ _ . _ . , . _• • • •· 0____. - • • - . __ • •- · · . · __ • • • • •-
1,917
19,334
0
6G
9,859
13,458
25,992
14,088
235,125
27,862
207,263
123,373
13,547
1,367
12,180
8,789
0
6,789
7,486
0
7,486
17,8:!5
0
8,807
2,078
2,618
17,635
7,233
6,807
3,374
30,16i
7.007
3,170
1,139
1,545
1,_
B63
4,548
1,591
7,498
3,781
3,824
480
3,005
151
8,798
1,142
0
0
0
4,042
3,224
4,113
470,726
4,718
34,892
308,026
341,148
2,168
29,278
5
2,163
19,399
0
19,399
31;.869
HAWAII
• • • • • ________• • • __________ • _ _ _ _ _ _ _ • • ______
0
168,986
934
63,585
55,101
739
6,987
2,587
346
5,844
41,042
28,899
5,839
80
4
378
2,767
55
845
0
8
73
0
0
18
0
84,514
2,007
7,682
34,418
4,179
0
46
40,582
30,211
44
13,354
1,751
3,099
B63
2,555
10,142
1,995
394
1,714
1,191
681
1,412
4,362
765
18,545
5,731
1,839
834
95B
1,925
1,734
11,594
599
545
545
522
428
92B
808
1,378
1,325
460,996
4,102
31,859
310,858
19,895
8,929
11,875
23,681
12,910
37,089
431,207
4,101
31,859
263,099
17,n8
8,929
11,875
23,881
12,844
37,043
404,856
3,587
V5,l87
15,384
7,594
9,484
33,277
0
3,587
26,499
248,688
1,582
0
9,484
88
13,n2
0
7,594
20,435
0
20,435
10,841
28,211
378,445
29,087
0
29,087
89,323
1,073
83,124
2,194
4,048
185,5$4
11,578
7,009
1S,3ge
2,117
8,457
54
33,224
7,718
2,614-
1,339
8,255
2,385
237,122
5,324
23,763
39,837
94,054
334
3,179
1,456
980
1,193
3,111
540
861
488
26,814
42,_
2,001
2,874
2,129
1,476
43,143
73,759
7,302
3,313
8,376
24,020
68,238
2,380
1,528
1,109
4,413
2,081
5,885
38,011
455
1,592
25,848
3,115
583
BB6
882
OTHER BORROWINGS
EQUITY CAPITAL
LOAN LOSS RESERVE
33.088
39,519
10,422
476
617
41
2.242
3,033
16,433
24,927
3.695
1,557
553
7,B06
1,225
730
104
1,532
1,583
363
LOAN COMMITTMENTS
LOANS SOLD
193.734
18,885
580
32
26,904
123.678
5,9n
153
17,886
90
2,586
21
20,248
7$)2
1,044
520
549
4,499
238
2.848
5,899
U.S.T.S.
SECONDARY MARKET
OTHER SEC.
LIABILITIES
TOTAL
DOMESTIC
DEPOSITS
TOTAL
FOREIGN (RESIDUAL)
DOMESTIC
DEMAND
TI~1E AND SAVtt..IQS
NOW
MMDA
SAVINGS
SMAll TIME
LARGE TIME
20,948
31,972
258
TOTAL
INTEREST
SALARIES
LOAN LOSS PROVISION
OTHER
29,522
1,918
10,765
8,544
226
B7
B9
3,418
8,785
B6
451
180
593
141
6
25,505
1,432
1,829
4,152
7.875
1,418
3,085
712
3,825
7,870
2,128
2,630
2,312
481
2.009
1,242
2,847
3,519
203
BB4
l,nl
9,681
8,375
109
225
B6
18,223
303
1,096
220
1,482
93
133
4B
26
211
152
20B
535
391
120
824
345
151
58
2,182
247
409
VO
BBO
=
832
2,404
18,013
1,371
17
EXPENSES
10,575
715
563
837
519
148
4,927
1,984
B7
139
384
378
230
543
26
84
2,738
1,222
290
TAXES
105
49
NETINCOMI!
2,945
80
90
1,500
184
82
131
253
131
247
78
155
384
2.85
1.32
1.21
2.68
1.88
1.23
3.32
1.67
1.53
2.58
1.27
0.22
0.33
2.20
0.45
0.99
1.06
4.01
0.18
0.06
0.08
0.47
2.36
0.58
0.34
0.63
0.50
1.12
INCOME BEFORE TAXES
LOAN LOSS RESERVE (ALL BANKS)
3.06
1.90
NET CHARGEOFFS. TOTAL
1.15
0.23
0.82
1.02
0.06
0.32
REAL ESTATE
COMMERCIAL
0.32
0.91
0.53
1.34
0.41
4.86
3.80
0.35
0.68
6.82
0.00
7.18
2.59
2.07
6.39
2.76
9.04
2.73
6.23
16.05
3.76
8.58
4:57
0.00
4.85
0.87
021
3.15
0.48
0.31
0.00
6.09
7.67
4.05
4.88
4.24
6.44
8.66
19.71
8.15
13.59
5.14
18.98
9.81
8.71
1.36
0.00
0.50
V.32
21.02
9.72
6.97
2.78
6.81
1.83
0.85
2.70
1.49
3.06
8.17
COMMERCIAL
8.49
3.50
12.71
8,23
CONSUMER
AGRICULTURE
3.28
8.15
2.32
0.00
7!il
8
2,597
CONSUMER
AGRICULTURE
PAST DUE & NON·ACCRUAL TOTAL
REAL ESTATE
CONSTRUCTION
COMMERCIAL
FARM
. 1-4 FAMILY REV
1-4 FAMILY OTHER
MULTI·FAMILY
NUMBER OF BANKS
NUMBER OF EMPLOYEES
245,583
1.n
2.58
6.50
7.52
3.88
8.72
0.94
9.94
1.33
2.85
0.44
2.69
2.51
1.09
38
457
17
19,145
161,029
8,351
8.06
2.62
5.81
0.74
1.84
1,23
0.87
2.51
14.88
0.91
0.40
1.50.
1.41
0.09
1.80
0.63
3.15
2.n
3.82
1.33
132
9.20
3.41
4,48
1.13
1.73
179
0.05
0.20
4.15
8.38
20.12
4.15
2.58
0.91
1.30
0.50
3.01
3.48
1,44
0.85
3.88
1,59
4.78
3.80
1.59
3.06
18
48
5,951
15,882
54
7,215
93
20,591
8.11
2.45
1.46
1.94
6.32
4.10
20
4,602
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.
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DEPOSITORY INSTIl1J11ONS REQUIRED TO HOlD RESERVES WITH THE FEDERAL RESERVE ON A WEEKLY BASIS
PERCENT OF COMBINED MARKET TOTAL FOR NOVEMBER 1992. BY REGION
----
ALASKA
ARIZONA
----
CAUF
HAWAII
DEPOSIT TYPE
CB SL CU
CB SL CU
CB SL CU
CB SL CU
CB SL CU
TOTAL DEPOSITS
DEMAND
NOW
SAVINGS & MMDAS
SMALL TIME
LARGE TIME
56
91
64
80
32
46
71
0 7
0 4
0 10
0 9
1 4
0
5
46 46 6
90
5 5
58 38 7
58 37 7
~ 73
3
40 50 10
67 28
89
3
85 32
61 33
51 47
80 18
DISTRICT
39
5
28
32
84
45
6
5
8
8
3
9
99
59
56
75
94
4
0
8
4
9
2
CB =COMMERCIAL BANKS;
25
1
35
40
16
4
93
96
89
90
95
94
5
8
3
6
2
4
NEVADA
CB SL CU
CB SL CU
91
96
92
92
88
89
5
0
3
4
10
8
73
97
~
3
78 18
80 15
42 54
82 37
SL • SAVINGS & LOANS AND SAVING BANKS; CU. CREDIT UNIONS;
US
~
~
CAUF
3
0
8
5
3
0
CB
SL CU
81 10 9
1 4
94
84
8 8
78 10 13
17 8
75 11 14
n
HAWAII
DATE
SAVINGS ACCOUNTS AND MMDAS
SEP92
OCT92
NOV92
3.00
2.94
2.90
3.11
3.05
3.05
2.71
2.64
2.65
2.97
2.81
2.79
3.26
3.26
3.26
3.54
3.50
3.50
SEP92
.OCT92
NOV92
3.16
3.11
3.14
3.17
3:15
3.14
2.94
2.88
2.88
3.04
2.91
2.90
3.05
3.05
3.05
3.26.·'
3.20
3.20
SEP92
OCT92
NOV92
4.62
4.60
4.70
4.52
4.50
4.56
4.22
4.11
4.11
3.93
4.06
4.02
4.44
4.61
4.36
4.99
57
6.36
6.43
128
7.13
6.75
48
29
6.88
91
8.44
44
7.45
11
6.89
13
7.04
N/A
6.71
127
8.16
42
6.78
15
N/A
N/A
8.60
13.55
17.39
8.76
12.83
18.29
9.90
14.80
17.90
8.11
13.37
18.98
N/A
N/A
N/A
10.50
10.50
92 TO 182 DAYS CERTIFICATES
2-1 /2 YEARS AND OVER CERTIFICATES
COMMERCIAL. SHORT TERM"
COMMERCIAL. LONG·TERM"
LOANS TO FARMERS"
CONSUMER. AUTOM081LE
CONSUMER, PERSONAL
CONSUMER, CREDIT CARDS
AVE. RATE
AVE. MAT. (DAYS)
AVE. RATE
AVE. MAT. (MONTHS)
AVE. RATE
AVE. MAT. (MONTHS)
AVE. RATE
AVE. RATE
AVE. RATE
ARIZ
N/A
N/A
N/A
WASH
CB SL CU
CB SL CU
n
67
89
85
58
40
47
8 15
5 8
89
82 3 15
70 8 ~
15 7
89 11 19
n
34
8
9
3
~ 11
28 16
58 4
51
2
MAY NOT SUM TO 100% DIUE TO ROUNDING
NPE OF ACCOUNT OR LOAN
DISTRICT
UTAH
IDAHO
OREGON
UTAH
WASH
3.02
2.94
2.94
3.25
3.23
3.23
3.34
3.27
3.25
,'3.15
3.13
3.11
3.28
3.25
3.25
3.53
3.51
3.49
5.10
5.10
5.11
5.03
4.84
5.74
4.65
4.60
4.61
4.78
4.59
4.60
8.07
N/A
6.41
56
N/A
N/A
N/A
N/A
7.56
7.04
5.44
37
7.15
39
7.20
N/A
N/A
5.36
144
6.71
23
4.61
7
7.50
10.52
19.25
9.40
13.13
17.90
8.99
12.48
18.30
N/A
SOURCES: SURVEY OF TERMS OF BANK LENDING AND TERMS OF CONSUMER CREDIT; MOST COMMON INTEREST RATES ON SELECTED ACCOUNTS.
" DATA ARE COMPOUNDED ANNUAL RATES.
N/A
@FedFRASER