Banks and banking - West ; Banks and banking - California ; Bank profits ; Federal Reserve District, 12th

Gary C. Zimmerman

English

Research Papers in Economics

FABSF WEEKLY LETTER
Number 92-17, April 24, 1992
California Banks' Problems Continue
in 1991 banks in the Twelfth District produced
mixed results. In most states, the banking indus-
try finished 1991 with a strong fourth quarter,
reporting robust earnings for the year and little
deterioration in asset quality. However, in Califor-
nia, where problemloans have been rising for
over a year, the story was different. California
banks finished the year with a huge loss in the
fourth quarter, their second consecutive quar-
terly loss. As a result, California banks, with
assets of $352.4 billion, earned only $651 mil-
lion for the entire year.
While industry performance in California was
dismal, there were important signs of improve-
ment in the national earnings picture. For exam-
pie, banking industry earnings for 1991 were $18.6
billion, up 15.1 percent from 1990. And return on
assets (ROA) for 1991, at 0.56 percent, is an im-
provement over the 0.49 percent recorded for
both 1989 and 1990. There also was continued
improvement in problem loan ratios in the fourth
quarter, ahopeful indication that at least nation-
ally, asset quality appears to be stabilizing.
The encouraging news on U.s. bank earnings is
tempered somewhat by the composition of earn-
ings. Almost $3 billion of the 1991 earnings arose
from gains from the sale of securities, as banks
took advantage of the declines in interest rates
over the year to generate gains by selling hold-
ings of investment securities. Despite a boost to
earnings from slightly widernet interest margins,
the difference between the average cost offunds
and the average return on loans and securities,
net operating earnings from banking operations
actually declined by over 1 percent from the year
earlier.
Strong showing outside of California
and Arizona
Bank performance generally remained robust
among the nine states in the Twelfth District ex-
cept California and Arizona. ROA for the fourth
quarter for the. othei seven states vv'as at or near
1 percent, a strong figure; combined with healthy
earnings in the first three quarters of1991, it re-
sulted in ROAs of greater than 1 percent for 1991
for banks in Alaska, Nevada, Washington, Hawaii,
and Idaho, while banks in Oregon and Utah
were not far behind, reporting ROAs of better
than 0.80 percent for the year.
Outside of California, some Twelfth District states
report increases in problem loan ratios, but they
generally remain well below those in either Cali-
.fornia or the nation. Although banks in Arizona
still face relatively high ratios of problem real es-
tate and business loans, they recorded moderate
earnings for 1991
California: problems worsen
California banking industry earnings plummeted
in the fourth quarter of 1991 as problem real es-
tate assets grew worse and loan loss provisions
soared. For the fourth quarter, California banks
posted a $384 million loss, compared to earn-
ings of $461 million in the same quarter of1990,
a relatively weak number to begin with. The
sharp deterioration in bank earnings over the past
year reflects the dramatic increase in problem
loans and the building of loan loss reserves. Cali-
fornia banks incurred $2.2 billion in expenses for
loan loss provisions in the fourth quarter alone,
about $1 billion more than average provisions in
the first three quarters.
Despite losses of $75 and $384 million in the
third and fourth quarters, respectively, California
banks still managed to generate earnings of $651
million for 1991 (ROA of0.19 percent). However,
1991 earnings in California paled when com-
pared either to industry performance nationwide
or to California bank earnings of $3.3 billion in
1990 (ROA of0.98 percent).
The depth of the problems facing California's
banking industry is apparent from Chart 1, which
WESTERn BAnKinG Western Banking is a quarterly review of banking
developments in the Twelfth Federal Reserve District. It is published in the Weekly Letteron the fourth Friday
ofJanuary, April, July, and October.FRBSF
rose relative to the problem loan ratios for the
rest of the Twelfth District (5.21 percent) and the
nation (8.12 percent). The ratio for California
banks still was below the national average due
to the better performance of residential mortgage
loans in California.
Gary C. Zimmerman
Economist
Despite the increases, the ratios of problem con-
struction and commercial real estate loans for
California banks are not as bad as some other
areas (see Chart 2). In particular, California's
ratios stiii remain below those for New England
(23.20 and 12.34 percent, respectively); the New
England figures ir:nproved noticeably following
the FDIC's resolution of Bank of New England.
New New
England York
Iiil Single Family, excluding home equity
Chart 2
Problem Real Estate Loan Ratios by Region
(Past Dua 30-89 days and Nonaccrual, December 31, 1991) Percent
35.0
30.0
25.0
20.0
15.0
10.0
5.0
0.0
Other
Twelfth
District oConstruction • Commercial
Difficulties in commercial real estate markets,
characterized by high vacancy rates and falling
rents, are exerting a strong negative impact on
the state's banking industry. In 1991 problem con-
struction loan ratios and pioblem.commercia!
real estate loan ratios stabilized nationally, while
in California these ratios increased by 6.09 and
1.59 percentage points, respectively. At the end
of the fourth quarter of 1991, problem construc-
tion loan ratios (18.60 percent for the u.s. and
20.29 percent for California) and commercial
real estate loans (8.60 percent for the nation ver-
sus 8.84 percent for California) exceeded the
u.s. ratios. As a group the largest banks in the
state have even higher ratios.
On the horizon
It has often taken the banking industry several
quarters to adjust to increased levels of problem
loans. For example, following the recession that
ended in 1982, problem loan ratios nationally
stayed at abnormally high levels for almost two
years. Thus, even if California banks' quality
problems were to stabilize at present levels,
banks will likely face a challenge over the next
year or more as they work to resolve their prob-
lem loans.
Chart 1
Return on Assets: California Banks by Size
Quarter-by-Quarter Percent
2.0
1.0
Moreover, when analyzed by peer groups, each
reported a loss in the fourth quarter. In the Dis-
trict states outside of California this pattern across
peer groups does not occur. The current pattern
also contrasts with the last period of significant
losses, which was 1987, when losses were mostly
confined to large banks with loans to less de~
veloped countries.
shows that the losses hit the entire spectrum of
banks, from the largest multinationals and re-
gionals to the smallest community banks. Fully
25 percent of California banks reported losses
for the year, up from only 12 percent in 1990.
Nationally only 10.8 percent of U.S. banks re-
corded losses for the year.
'-90-:0:-1'-90"'""'::0""'"2~90--:::0-'3 -90-:0~4-91-:01-'-9-1:-02 .....9-1 :-03...... 9-1 :0.....J 4 -1.0
• Large Banks I!iJ Medium-Sized Banks 0 Small Banks
In California, problem or delinquent loan ratios
(reported here as loans 30 days or more past due
plus nonaccrual loans divided by all loans of that
category) generally rose in the fourth quarter, al-
though not as rapidly as they did in the previous
four quarters. Problem loan ratios in California
now are near or above the ratios for the nation.
For example, for California banks with more than
$100 million in assets, the total problem loan
ratio for the fourth quarter of 1991 (6.96 percent)
is now above the ratio for the U.S. (6.13 percent),
and the ratio has increased by more than 2 per-
centage points since year-end 1989. In contrast
to the growing problems in California, problem
loan ratios for all other states in the District (ex-
cept Nevada at 5.53 percent) are at or below
5 percent.
Real estate woes continue
Reflecting the continued weakness in real estate
markets, especially in commercial real estate, the
fourth quarter 1991 problem real estate loan ratio
for California increased from 7.56 in the third
quarter to 7.82 percent in the fourth quarter, andREGIONAL BANK DATA
DECEMBER 31, 1991
(NOT SEASONAllY ADJUSTED, PRELIMINARY DATA)
DiSTRICT ALASKA ARiZONA CALI F. HAWAii !DAHO NEVADA OREGON UTAH WASH.
~ _. -_ ...... - .._.---- -_._---. ..-.--.-- --..--.-
ASSETS AND liABILITIES -- $ MilLION (All .COMMERCIAl BANKS)
ASSETS TOTAL 517,590 4,611 35,596 35Z,414 20,766 9,760 15,214 25,741 13,849 39,639
FOREIGN 34,301 0 NIA 32,400 1,745 NIA NIA 3 84 70
DOMESTIC 483,288 4,611 35,596 320,014 19,021 9,760 15,214 25,739 13,765 39,569
lOANS TOTAL 366,929 2,041 23,230 255,645 13,209 6,589 10,752 17,193 8,655 29,614
FOREIGN 30,719 5 NIA 29,234 1,416 NIA NIA NIA NIA 63
DOMESTIC 336,211 2,036 23,230 226,411 11,793 6,589 10,752 17,193 8,655 29,551
REAL ESTATE 169,615 877 7,288 127,460 6,671 2,035 2,603 6,633 .,. 4n., 12,856 ~, 17"
COMMERCiAL 73,276 688 2,984 49,823 3,099 1,510 1,109 4,808 1,755 7,500
CONSUMER 60,151 309 5,520 31,940 1,233 1,769 6,303 3,571 3,058 6,447
AGRICUlTURE 5,957 5 393 3,016 24 761 16 496 162 1,084
iNTERNATIONAL 127 NIA 8 120 0 NIA NIA NIA NIA 0
SECURITIES TOTAL 54,150 1,915 5,040 29,266 4,155 1,868 1,977 3,635 2,788 3,505
U.S.T.S. 17,121 931 1,609 9,036 1,694 1t07 831 1,020 437 1,158
SECONDARY MARKET 25,000 512 2,319 14,467 1,683 973 622 1,688 1,587 1,148
OTHER SEC. 12,029 473 1,112 5,763 778 488 524 927 765 1,200
LIABilITIES TOTAL 483,061 4,055 32,845 330,538 19,342 9,091 14,139 23,666 12,723 36,662
DOMESTIC 448,760 4,055 32,845 298,139 17,597 9,091 14,139 23,663 12,639 36,592
DEPOSITS TOTAL 417,729 3,534 30,353 286,743 16,190 7,618 9,086 20,272 10,497 33,435
FOREIGN 32,974 0 NIA 31,121 1,554 NIA NIA NIA 84 214
DOMESTIC 384,755 3,534 30,353 255,621 14,636 7,618 9,086 20,272 10,414 33,221
DEMAND 86,694 985 5,167 61,392 2,439 1,277 2,171 3,789 1,994 7,480
TIME AND SAVINGS 298,061 2,549 25,186 194,229 12,197 6,342 6,915 16,483 8,420 25,741
NOW 39,633 300 3,099 24,848 1,470 951 1,106 2,752 1,330 3,m
MMDA 86,202 523 6,718 60,597 2,127 1,315 2,236 3,968 1,812 6,907
SAViNGS 38,654 547 2,449 25,268 2,339 635 1,403 1,689 1,069 3,255
SMAll TIME 85,613 611 10,912 48,554 2,290 2,805 1,242 6,753 3,387 9,058
LARGE TIME 47,570 537 1,996 34,760 3,970 635 925 1,318 812 2,619
OTHER BORROWiNGS 44,320 480 2,047 26,732 2.551 1,366 4,241 2,794 2,017 2,093
EQUITY CAPITAL 34,529 556 2,751 21,875 1;424 669 1,074 2,075 1,126 2,977
lOAN· lOSS RESERVE 10,419 40 560 8,074 204 93 321 413 205 509
lOAN COMMITMENTS 198,548 555 18,577 138,081 5,939 2,257 1,752 9,622 6,132 15,633
lOANS SOLD 30,420 11 266 29,212 275 32 118 279 67 160
lOAN LOSS RESERVE (ALL BANKS) 2.84 1.98 2.41 3.16 1.54 1.41 2.99 2.40 2.37 1.72
NET CHARGEOFFS, TOTAL 1.38 0.17 1.48 1.52 0.13 0.43 2.94 1.03 1.49 0.54
REAL ESTATE 0.70 0.13 2.15 0.74 0.03 0.05 0.38 0.59 0.56 0.22
COMMERCIAL 1.73 0.09 2.30 1.90 0.10 0.96 4.72 1.68 2.53 0.54
CONSUMER 2.70 0.55 1.84 3.29 0.74 0.69 3.86 1.38 2.37 1.18
AGRICUlTURE 0.29 NIA 2.74 0.05 1.37 -0.06 -0.08 0.05 0.18 0.34
PAST DUE & NON-ACCRUAL, TOTAL 6.08 4.53 4.97 6.96 1.70 2.13 5.53 4.66 4.62 3.85
REAL ESTATE 7.16 4.55 9.13 7.82 1.65 2.64 4.41 6.00 6.43 4.88
COMMERCiAL 7.10 5.26 11.09 7.83 1.87 2.65 12.38 4.39 5.24 4.08
CONSUMER 3.61 3.03 2.64 4.14 2.04 1.77 5.39 1.67 2.94 2.08
AGRICULTURE 5.05 NIA 8.32 5.41 1.17 1.42 0.36 5.88 3.65 4.94
EARNINGS AND RETURNS--$ MILLION, YEAR-TO-DATE (ALL COMMERCIAL BANKS)
INCOME TOTAL 54,342 448 3,480 37,010 1,880 954 2,161 2,696 1,468 4,244
INTEREST 44,724 381 2,772 30,579 1,684 836 1,614 2,187 1,238 3,435
FEES & CHARGES 2,728 22 191 1,846 39 53 64 170 75 267
EXPENSES TOTAL 50,645 349 3,382 35,550 1,523 798 1,857 2,398 1,289 3,499
INTEREST 22,717 166 1,559 15,708 913 449 555 1,071 618 1,678
SALARIES 9,064 90 652 6,246 295 127 215 497 194 747
lOAN LOSS PROVISION 7,195 8 257 5,777 44 33 399 315 139 223
OTHER 11,669 85 914 7,818 271 189 687 516 338 851
INCOME BEFORE TAXES 3,629 99 98 1,394 357 156 304 297 180 745
TAXES 1,479 28 36 736 131 55 99 91 54 248
NET INCOME 2,146 71 62 651 226 101 206 206 126 497
ROA (%) 0.42 1.55 0.18 0.19 1.12 1.05 1.50 0.81 ·0.93 1.27
ROE (%) 6.21 12.70 2.24 2.98 15.88 15.13 19.14 9.93 11.16 16.71
NET iNTEREST MARGiN (%) 4.29 4.73 3.45 4.23 3.83 4.02 7.74 4.39 4.59 4.48
NUMBER OF BANKS 782 8 39 475 20 22 19 51 55 93
NUMBER OF EMPLOYEES 240,189 2,559 18,828 153,563 8,356 4,991 6,420 15,978 7,049 22,445
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 ofthe 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 INSTITUTIONS REQUIRED TO HOLD RESERVES WITH THE FEDERAL RESERVE ON A WEEKLY BASIS
(PERCENT OF COMBINED MARKET TOTAL FOR FEBRUARY 1992, BY REGION)
DISTRICT ALASKA ARIZONA CALIF HAWAII IDAHO NEVADA OREGON UTAH WASH
DEPOSIT TYPE CB 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 CB SL CU
TOTAL DEPOSITS
DEMAND
NOW
SAVI NGS & MMDAS
SMALL TIME
LARGE TIME
54 41 5
91 4 5
65 28 7
6032 8
3363 3
4846 5
71 424
99 0 1
59 6 35
55 4 41
75 8 17
94 2 3
93 1 7
95 0 5
90 0 10
90 0 10
95 1 4
94 1 6
4748 5
90 5 6
59 35 6
5638 6
25 73 3
43 51 6
68 28 5
89 3 7
6928 3
63 29 7
44 52 4
82 16 2
91 5 3
93 0 7
94 3 3
94 3 3
89 10 2
89 6 4
72 25 3
99 1 0
7816 6
82 14 4
41 56 3
62 38 0
81 11 8
94 1 5
84 8 8
78 10 12
76 18 6
83 10 7
78 8 13
88 3 9
84 4 13
72 622
n 15 8
83 10 7
5636 9
90 7 4
64 24 11
58 25 17
41 55 4
50 49 2
CB = COMMERCIAL BANKS; SL = SAVINGS & LOANS AND SAVINGS BANKS; CU = CREDIT UNIONS; MAY NOT SUM TO 100% DUE TO ROUNDING
TYPE OF ACCOUNT OR LOAN DATE US DISTRICT ARIZ CALIF HAWAII IDAHO OREGON UTAH WASH _____•_____________ -----_ .. -_ .... oo- ___ .. ______ .. __ .. _.............. __ ....... _________ ...._.. ________ .. ______ .. ___ .. __ .. ________________ .. __ .. __ ~ __ .. ___.__
SAVINGS ACCOUNTS AND MMDAS"" DEC91 4.30 4.32 3.87 4.31 4.63 4.20 3.98 4.67 4.48
JAN92 3.93 3.93 3.57 3.82 4.41 4.13 3.64 4.08 3.84
FEB92 3.78 3.81 3.55 3.76 3.99 4.16 3.55 4.D2 3.72
92 TO 182 DAYS CERTIFICATES DEC91 4.42 4.31 3.93 4.26 4.50 4.06 4.20 4.48 4.52
JAN92 4.07 3.91 3.62 3.89 4.03 3.70 3.73 4.16 4.21
FEB92 4.00 3.85 3.66 3.86 4.05 3.70 3.70 4.12 3.88
2·1/2 YEARS AND OVER CERTIFICATES DEC91 5.55 5.37 4.76 5.17 5.66 5.67 5.39 5.47 5.36
JAN92 5.30 4.96 4.47 4.86 5.12 5.39 4.99 5.28 4.93
FEB92 5.37 5.03 4.74 4.87 5.29 5.44 5.09 5.33 4.80
COMMERCIAL, SHORT·TERM· AVE. RATE 5.54 6.64 7.41 6.41 6.46 N/A 7.01 5.61 7.06
AVE. MAT. (DAYS) 53 129 63 155 92 N/A 15 50 215
COMMERCIAL, LONG· TERM" AVE. RATE 6.38 7.95 N/A 7.84 9.75 N/A N/A 9.44 7.12
AVE. MAT. (MONTHS) 41 40 N/A 34 50 N/A N/A 44 35
LOANS TO FARMERS· AVE. RATE 8.06 6.81 7.21 6.84 N/A 7.91 5.97 8.75 7.76
AVE. MAT. (MONTHS) 14 6 N/A 7 N/A N/A 3 11 10
CONSUMER, AUTOMOBI LE AVE. RATE 9.89 9.90 11.00 10.11 N/A 10.50 8.92 9.94 9.16
CONSUMER, PERSONAL AVE. RATE 14.39 13.64 14.00 13.18 N/A 11.00 13.47 15.00 13.16
CONSUMER, CREDIT CARDS AVE. RATE 18.09 18.51 18.00 18.98 N/A N/A 19.25 21.00 17.93 -- -_ ..--_.- -_ .. -_ ..------ -_ ..----------....----...-.------------_ ........------ --_ .. -_ ..--- -_ ..-- _.. -_ ..--- ..-- --_ ..------ --_.......------.-------
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 OCTOBER 1991.

California banks' problems continue

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California banks' problems continue

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