Banks and banking - West ; Banks and banking - California

Jonathan A. Neuberger

Karen J. Trenholme

English

Research Papers in Economics

FABSF WEEKLY LETTER
Number 92-27, July 24, 1992
First Quarter Bank Results:
Good News, Bad News
After several quarters of poor performance in
the banking sector, the first quarter of 1992
contained some good news. The nation's banks
reported record profits, rising returns on assets
(ROA), and declining problem loan ratios. The
Twelfth Federal Reserve District, however, had
mixed results. Outside of California, the District's
banks performed well, echoing the improvements
in the rest of the country. California's banks, in
contrast, reported declining revenues relative to
the previous year, low ROA, and rising problem
loan ratios. These poor results confirm that the
region's banks are suffering from hard times.
. The results for California banks, however, may
overstate the extent of their problems. California
banks aggressively set aside reserves against
future loan losses, and despite weak earnings,
continued to build equity capital ratios. While
these factors provide some cause for optimism,
it is difficult to say how long the California banks'
problems will persist. In this Letter, we describe
the first quarter bank results and try to place
these results in perspective.
In the nation: higher earnings, lower losses
In the first quarter of 1992, commercial banks
nationally earned a record $7.5 billion, nearly
$2 billion more than in the same quarter of 1991
A favorable interest rate environment especially
helped the nation's banks, as they enjoyed their
highest net interest margins since 1988. Low
interest rates also created opportunities to profit
from the sale of investment securities, which
contributed more than $680 million to the year-
over-year improvement in pre-tax earnings. Re-
turn on assets for u.s. banks stood at 0.88 in the
first quarter of 1992, up from 0.67 a year earlier.
Banks used the increased earnings to add to loan
loss reserves and to build equity capital cush-
ions. Loan loss provisions nationwide were $7.2
billion in the first quarter of1992, roughly the
same as a year ago. Equity capital as a percent of
total assets rose from 6.7 percent in the first quar-
ter of 1991 to 7.0 percent in the first quarter of
this year.
Accompanying these improved financial results
were declining problem loan ratios nationwide.
Total problem loan ratios (defined as all loans 30
or more days past due or on nonaccrual status,
divided by total loans) fell from 6.7 percent in
the first quarter of 1991 to 6.0 percent in the first
quarter of 1992. Fewer problem real estate loans,
business loans, and consumer loans all contrib-
uted to the decline. Net chargeoffs also leveled
off, suggesting that credit quality problems at
banks nationally may have stabilized.
California lags behind
Excluding California, Twelfth District bank per-
formance was strong in the first quarter. Earnings
were $467 million, up 10 percent from the previ-
ous year's first quarter. Banks in every state ex-
cept California and Arizona reported ROAs over
10. Problem loan ratios at banks in the Twelfth
District, excluding California, were stable or de-
clining in the quarter and were below national
averages.
In California, first quarter earnings were $270
million, down 64 percent from a year earlier.
Much of this earnings decline can be attributed
to loan loss provisions of $12 billion-more than
double the provision from the first quarter of
1991-and to the performance of a few of the
WESTERn BAnKinG Western Banking is a quarterly review of banking
developments in theTwelfth Federal Reserve District. It is published in the Weekly Letteron the fourth Friday
of January, April, July, and October.FRBSF
largest banks in the state. Combined earnings at
the ten largest California banks fell 80 percent
from a year earlier, a drop of almost $490 million.
In contrast, the next ten largest banks reported a
cornbined earnings increase of almost 80 percent
(a little over $20 million). But the problems in
California are not confined to a few big banks.
The remaining 450 banks in the state posted a
4 percent decline in combined earnings from the
first quarter of 1991, a drop of about $4 million.
First quarter ROAs reflect the same pattern as
earnings: 0.19 for the ten largest banks, 1.45 for
the next ten largest banks, and 0.58 for the rest
of California's banks.
Rising problem loan ratios are particularly ev-
ident at California banks. For all banks in the
state, the ratio of problem loans to total loans
rose 1.7 percentage points from a year earlier,
to 7.5 percent (see Chart 1). In fact, problem loan
ratios in ail major loan categories rose from the
first quarter of 1991 to the first quarter of 1992.
PiOblem real estate loans, in particular, plague
Ca.lifornia banks. For example, the problem loan
ratio for construction loans, which are a compo-
nent of real estate loans, is over 27 percent for
California banks with over $1 billion in assets,
while nationally the average is about 19 percent.
Similarly, problem commercial real estate loans
at these large banks were about 12 percent in
the first quarter, compared to the national aver-
age of 8.7 percent. For the smaller California
banks, problem real estate loan ratios were be-
low national averages in the first quarter but rose
significantly.
Chart 1
Problem Loan Ratios Percent
10
A ray of hope for California?
The figures above suggest that the difficulties fac-
ing California's banks are significant. While the
industry nationwide exhibits steady improve-
ment, the condition of California banks, particu-
larly in the area of problem loan ratios, continues
to worsen. However, the data do provide some
reasons for optimism.
First, despite a very weak economic climate and
large loan loss provisions, banks in California still
reported positive earnings for the first quarter af-
ter two consecutive quarters of negative earnings.
Second, banks in California are actively reclassi-
fying credits, recognizing current and potential
problem loans, and are making large additions
to loan loss reserves. Thus, banks in the state are
actively recognizing that problems exist and have
begun to build the financial reserves to absorb
future losses. Finally, despite the weakness in
earnings, California banks increased equity capi-
tal ratios. The ratio for the state's banks was' 6.5
percent of assets in the first quarter of 1992, up
from 6.4 percent inthe first quarter of 1991.
Where have aii the bank loans gone?
The first quarter results reflect another impor-
tant development affecting the banking industry
nationally, namely, slow growth in bank assets.
Compared to year-earlier figures, total assets at
the nation's banks grew only 2.3 percent. More
important, total loans fell over 2.5 percent from
the first quarter of 1991. This year-over-year de-
cline in bank loans includes a 10.2 percent drop
in business loans, a 3.7 percent decline in con-
sumer loans, and a 2.9 percent increase in real
estate loans. The only component of bank port-
folios that showed any significant growth was
securities holdings, which rose 15 percent. These
asset growth patterns were even more pronounced
in California: loans dropped 4 percent from the
first quarter of 1991 to the first quarter of 1992,
while securities holdings skyrocketed more than
43 percent.
U.S. Banks
California Banks Clearly, these bank asset growth figures reflect
general economic conditions as well as a shift by
some borrowers away from bank credit. Facing
weak loan demand, banks have sought alterna-
tive assets and have accumulated large securities
portfolios, especially of Treasury and govern-
ment-backed mortgage securities. Regulatory
pressures also may have influenced bank deci-
sionsin this regard, as these securities receive
favorable treatment under the risk-based capital
standards.
Jonathan A. Neuberger
Economist
Karen J. Trenholme
Research Associate
6
4
2
o
8
1991:11992:1
Consumer Loans
1991:11992:1
C&I Loans
1991:11992:1
Real Estate Loans
1991:11992:1
Total LoansREGIONAL BANK DATA
MARCH 31, 1992
(NOT SEASONALLY ADJUSTED, PRELIMINARY DATA)
DISTRICT ALASKA ARIZ. CALI F. HAllAII IDAHO NEVADA OREGON UTAH IIASH.
-.------ ----_.. ------- ----_.. ---_..- .-.----
ASSETS TOTAL 510,770 4,580 35,650 345,781 21,334 9,619 15,077 25,524 13,937 39,268
FOREIGN 34,668 1 N/A 32,453 2,036 N/A N/A 0 110 68
DOMESTIC 476,102 4,579 35,650 313,328 19,298 9,619 15,077 25,524 13,827 39,200
LOANS TOTAL 359,064 2,013 22,249 248,646 13,287 6,535 10,300 18,066 8,645 29,325
FOREIGN 29.520 5 N/A 28,070 1,385 N/A N/A N/A N/A 59
DOMESTIC 329,545 2,008 22,249 220,575 11,901 6,535 10,300 18,066 8,645 29.266
REAL ESTATE 168,204 865 7,218 125,622 6,794 2,037 2,771 6,866 3,323 12,709
COMMERCIAL 70,842 685 2,855 48,038 3,050 1,508 895 4,642 1,645 7,524
CONSUMER 57,459 309 5,337 29,886 1,179 I,m 5,872 3,572 3,036 6,494
AGRI CULTURE 5,448 6 364 2,717 41 665 15 443 154 1,043
INTERNATIONAL 123 N/A 7 115 0 N/A N/A N/A N/A 0
SECURITIES TOTAL 57,702 1,953 5,973 30,939 4,493 1,767 2.253 3,783 2,889 3,652
U.S.T.5. 19,227 847 2,072 9,877 2,103 359 1,075 1,114 518 1,262
SECONDARY MARKET 26,748 592 2,987 15,325 1,643 915 692 1,760 1,667 1,167
OTHER SEC. 11,726 514 914 5,737 747 493 486 909 703 1,223
LIABILITIES TOTAL 475,131 4,003 32,920 323,385 19,865 8,925 13,675 23,369 12,772 36,217
DOMESTIC 440,463 4,003 32,920 290,932 17,830 8,925 13,675 23,369 12,662 36,149
DEPOSITS TOTAL 413,291 3,501 30,309 283,670 15,648 7,496 9,046 20,107 10,534 32,980
FOREIGN 32,717 1 N/A 30,709 1,788 N/A N/A N/A 110 108
DOMESTIC 380,574 3,500 30,309 252,961 13,859 7,496 9,046 20,107 10,424 32.871
DEMAND 85,945 1,009 5,178 61,086 2,248 1,224 2,140 3,727 1,945 7,3B7
TIME AND SAVINGS 294,629 2,491 25,131 191,875 11.611 6,271 6,907 16,380 8,479 25,484
NOW 40,084 288 3,281 24,793 1,470 950 1,147 2,877 1,378 3,899
MMDA 90,434 547 7,367 63,581 2,046 1,369 2,337 4,256 1,899 7,031
SAVINGS 41,437 565 2,829 26,420 2,657 763 1,439 1,853 1,187 3,724
SHAll TIME 80,137 558 9,840 45,880 2,168 2,627 1,118 6,341 3,208 8,338
LARGE TIME 42,122 504 1,796 30,992 3,268 561 803 1.049 803 2,344
OTHER BORROWINGS 41,061 459 2,078 22,728 3,604 1,312 3,861 2,694 2,027 2,299
EQU ITY CAP lTAL 35,639 577 2,730 22.396 1,469 694 1,402 2,155 1,165 3,051
LOAN LOSS RESERVE 10,783 41 556 8,332 212 96 362 429 213 542
LOAN LOSS RESERVE (ALL BANKS) 3.00 2.02 2.50 3.35 1.60 1.47 3.52 2.37 2.47 1.85
NET CHARGEOFFS, TOTAL 1.40 0.12 1.94 1.54 0.20 0.36 2.72 , 0.68 1.07 0.66
REAL ESTATE 0.79 -0.06 1.79 0.90 0.00 -0.03 0.37 0.15 0.47 0.25
COMMERCIAL 1.75 0.27 6.31 1.87 0.50 0.81 1.01 1.20 0.74 0.70
CONSUMER 3.20 0.33 2.66 4.03 0.66 0.63 4.32 1.65 2.17 1.24
AGRICULTURE 0.30 N/A -0.44 0.39 N/A 0.03 N/A 0.14 1.87 0.39
PAST DUE & NON-ACCRUAL, TOTAL 6.35 5.28 4.15 7.45 2.18 2.44 5.55 4.17 3.38 4.16
REAL ESTATE 7.82 5.36 7.58 8.71 2.22 3.08 6.73 5.09 4.71 5.76
COMMERCIAL 7.22 5.92 7.63 8.17 2.76 2.44 6.59 5.62 3.15 4.10
CONSUMER 3.48 2.92 2.64 4.03 1.92 1.47 5.48 1.67 2.37 1.92
AGR ICULTURE 6.19 N/A 8.59 7.19 1.19 4.62 0.17 6.37 3.18 3.85
INCOME TOTAL 12,475 109 821 8,360 445 223 544 645 357 971
INTEREST 10,002 88 655 6,715 400 192 386 509 290 767
FEES & CHARGES 724 6 52 495 11 14 12 44 20 70
EXPENSES TOTAL 11,116 78 782 7,698 353 180 377 523 296 829
INTEREST 4,269 32 311 2,905 193 90 91 211 122 314
SALARIES 2,298 23 158 1,594 79 32 39 132 50 191
LOAN LOSS PROVISION 1,576 2 90 1,225 15 8 81 46 32 79
OTHER 2,974 22 223 1,975 67 51 166 134 92 244
INCOME 8EFORE TAXES 1,323 31 39 627 92 42 167 121 61 143
TAXES 602 9 24 360 33 15 56 41 19 45
NET INCOME 737 21 27 270 59 28 III 80 42 98
ROA (%) 0.58 1.90 0.31 0.31 1.17 1.17 2.96 1.26 1.25 1.01
ROE (%) 8.27 14.85 3.98 4.83 16.17 16.05 31.56 14.92 14.51 12.84
NET INTEREST MARGIN (%) 4.50 5.05 3.90 1 •.39 4.08 4.27 7.90 4.67 4.96 4.68
NET OVERHEAD MARGIN (%) -2.32 -2,53 -2.51 -2.37 -2.02 -2.18 -1.30 -2.10 -2.20 -2.45
NUMBER OF BANKS 771 B 39 468 19 22 19 51 54 91
NUMBER OF EMPLOYEES 239,500 2,579 18,277 154,699 8,350 4,893 6,125 15,623 7,137 21,817
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 INSTITUTIONS REQUIRED TO HOLD RESERVES WITH THE FEDERAL RESERVE ON A WEEKLY BASIS
(PERCENT OF COMBINED MARKET TOTAL FOR MAY 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
SAVINGS & MMDAS
SMALL TIME
LARGE TIME
5440 6
90 4 5
64 28 8
6032 8
3363 3
4845 7
71 4 25
99 0 1
59 6 35
54 4 41
75 8 16
94 2 4
92 0 7
95 0 5
89 0 11
90 0 10
95 1 4
94 0 5
4847 5
90 5 6
5835 6
5638 6
25 73 3
4349 8
6728 5
89 4 7
6730 3
61 31 8
46 50 4
81 16 3
91 5 3
94 0 6
93 3 3
93 4 3
89 10 1
88 6 5
72 25 3
98 2 0
78 16 6
82 15 4
41 56 3
59 41 0
80 11 9
94 1 5
84 8 8
76 11 13
76 18 6
79 11 10
78 814
89 4 7
83 4 13
71 623
78 15 7
73 11 16
56 35 9
90 7 4
64 24 12
57 26 18
40 56 4
50 48 2
CB = COMMERCIAL BA'NKS; SL = SAVINGS & LOANS AND SAVINGS BANKS; CU = CREOIT UNIONS; MAY NOT SUM TO 100% DUE TO ROUNDING
TYPE OF ACCOUNT OR LOAN DATE US DISTRICT ARIZ CALIF HAWAII IDAHO OREGON UTAH WASH
-----_......_-------...._---------.._--------.-..__...----.-._------------._._...-----------.-...__.----...-------_.....----._.
SAVINGS ACCOUNTS AND MMDAS"" MAR92 3.74 3.79 3.45 3.70 4.01 4.17 3.53 4.00 3.68
APR92 3.63 3.70 3.25 3.60 4.02 4.01 3.42 3.91 3.65
MAY92 NA 3.67 3.22 3.56 3.88 4.04 3.37 3.86 3.68
92 TO 182 OAYS CERTIFICATES MAR92 4.01 3.86 3.67 3.82 4.08 3.72 3.73 4.13 3.85
APR92 3.90 3.81 3.61 3.75 4.08 3.68 3.66 4.02 3.93
MAY92 NA 3.76 3.47 3.63 4.05 3.72 3.60 3.93 4.00
2'1/2 YEARS AND OVER CERTI FICATES MAR92 5.49 5.10 4.50 5.16 5.71 5.46 5.09 5.32 4.93
APR92 5.48 5.15 4.47 5.18 5.71 5.46 5.12 5.32 5.14
MAY92 NA 5.17 4.47 5.08 5.63 5.62 5.37 5.30 5.30
COMMERCIAL, SHORT-TERM" AVE. RATE 5.38 6.59 7.66 6.75 7.13 NA 6.88 7.20 5.91
AVE. MAT. (DAYS) 44 199 145 226 91 NA 57 251 32
COMMERCIAL, LONG-TERM" AVE. RATE 6.78 7.76 NA 7.29 8.72 NA NA 8.64 NA
AVE. MAT. (MONTHS) 40 41 NA 33 30 NA NA 57 NA
LOANS TO FARMERS" AVE. RATE 8.06 7.09 7.09 7.02 NA 7.78 6.91 5.01 7.75
AVE. MAT. (MONTHS) 14 7 NA 9 NA NA 7 2 6
CONSUMER, AUTOMOBILE AVE. RATE 9.52 9.67 10.25 9.74 NA 10.50 8.98 9.82 8.96
CONSUMER, PERSONAL AVE. RATE 14.28 13.80 14.38 14.50 NA 11.00 12.38 14.98 12.43
CONSUMER, CREDIT CARDS AVE. RATE 17.97 18.52 18.00 18.98 NA NA 19.25 21.00 17.97 ----_.-_...._---_._._-------.-..._-------------_._------------_._----------_._.-._-----_._._.._._.----..._._.-----------------
SOURCES: SURVEY OF TERMS OF 8ANK LENDING AND TERMS OF CONSUMER CREDIT; MOST COMMON INTEREST RATES ON SELECTED ACCOUNTS.
" DATA ARE COMPOUNDED ANNUAL RATES. "" SAVINGS AND MMDAS COMBINED AS OF APRIL 1992.

First quarter bank results: good news, bad news

http://www.frbsf.org/publications/economics/letter/1992/el92-27.pdf

First quarter bank results: good news, bad news

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