Banks and banking - West ; Bank loans ; Real property ; Federal Reserve District, 12th

Gary C. Zimmerman

English

Research Papers in Economics

FRBSF WEEKLY LETTER
Number 91-27, July 26, 1991
Real Estate Loan
Problems in the West
in the West, as measured by problem loan ratios,
is still better than that reported by the industry as
a whole. In March 1991 problem loan ratios were
5.66 and 5.82 percent for western and California
banks, respectively, compared to 8.8 percent for
the nation.
Furthermore, the historical time series for
problem real estate loans at large banks (with
over $100 million in assets) shown in the chart
also helps to put the current figures in perspec-
tive. Despite the upturn in problem realestate
loans in the West after June 1990, problem loan
ratios for the region also remain well below that
experienced at the end of the last recession
in 1982.
Problem Real Estate Loans* Percent
11
10
9
8
7
6
5
4
3
2
1
o
91
California
'.'. ,"., ....
,'"
~"'"
\ •...•. Twelfth District ....
\ --~
US'" ... _ - - - -
83 84 85 86 87 88 89 90
'Annual data 1983-1988; quarterly data 1989-1991
In this Letter problem loan ratios are evaluated
to gauge the severity of the recent deterioration
in western banks' real estate loan portfolios,
vvhich include about half of all bank loans.
Clearly, the problems experienced in the region
reflect the impacts of the recession and the real
estate slump. However, the evidence also sug-
gests that asset quality deterioration has been less
severe in the West than in the nation as a whole,
and that current indicators are not out of line
with those at the end of the last recession.
Real estate loans have been a source of losses
for banks in many areas of the country since
before the recession began. Recently, Federal
Deposit Insurance Corporation Chairman Wil-
liam Seidman raised concerns about problem
real estate loans in California, which has focused
attention on the quality of real estate loans at
western banks, especially those headquartered
in California.
Commercial real estate problems
Banks' equity capital and loan loss reserves
provide a cushion against losses on real estate,
commercial, and consumer loans and against
the risk of earnings disruptions arising from asset
quality problems. However, while banks nation-
wide have added about $19 billion in equity
capital and loan loss reserves since year-end
1989, their "problem" loans (defined as loans
30 days or more past due or no longer accruing
interest) have increased by nearly double that
amount.
In the three quarters since June 1990, such
problem real estate loans in the western region
have nearly doubled as a percent of total real
estate loans. Despite this increase, asset quality
The data for March 1991 for the first time also
provide a breakdown of real estate loans by cate-
gory for all banks. These data clearly indicate the
WESTERn BAnKinG Western Banking is a quarterly review of banking
developments in the Twelfth Federal Reserve District. it is published in the Weekly Letter on the fOUith
Friday ofJanuary, April, July, and October.FRBSF
sources and magnitude of real estate loan prob-
lems. Nationally, only 3.2 percent of single fam-
ily loans are reported as problem loans in March;
in the western region, the number is even smaller
- L9 percent. Commercial real estate and con-
struction loans, however, both in the nation and
in the region, have deteriorated much more.
About 13 percent of all bank loans in the nation,
or $240 billion, are secured by commercial real
estate. Western banks ($43.7 billion) and Califor-
nia banks ($30.7 billion) hold about the same
share of their loan portfolio in commercial real
estate loans as do banks nationally. In March,
U.S. banks reported that 9.39 percent, or $22.5
billion, of their commercial real estate loans
were past due or on nonaccrual status. These
ratios also are high in the region (6.75 percent)
and in California (7.28 percent), but are still well
below the industry average; these ratios are less
than half the problem loan ratios reported in the
depressed Northeast region.
Commercial real estate loan problems are
likely to remain a major drag on asset quaiity
and earnings, because overbuilding in this sector
has resulted in high vacancy rates and falling
rental rates in many markets. Salomon Brothers,
for example, estimated that there is roughly an
ll-year supply of commercial office space nation-
ally. Thus many analysts expect that commercial
real estate loans may continue to deteriorate
even if the economy turns around quickly.
Construction loan problems
Construction financing traditionally has been
a relatively high risk activity, reflecting the nature
ofthe construction industry itself. Nationally,
banks' troubled loan figures for March bear this
out. Problem construction loans, at $22.8 billion,
exceeded the amount of troubled commercial
real estate loans, even though outstanding con-
struction and land development lending for the
U.s., at $121 billion, is only half the level of
commercial real estate lending.
Further deterioration in construction loan quality
could have a disproportionate impact on banks'
performance in the West, because construction
lending is a larger part of banks' loan portfolios
in this region than in the nation. In March 1991,
construction lending accounted for 6.5 percent
of total loans for the U.s., 9.1 percent for the
region, and 9.7 percent in California.
Still, western banks are reporting lower levels
of problem construction loans than banks nation-
ally. In March U.S. banks reported that 18.8 per-
cent of their construction loans were problem
loans, whereas banks in the region and California
reported 13.4 and 14.2 percent, respectively. In
contrast, New England banks reported problem
loan ratios more than twice the ratio for
California.
Given many analysts' prognoses for a weak
recovery in construction and housing, and the
likelihood that the high level of problem loans
today may result in increased loan charge-off
rates in the future, even the lower level of deteri-
oration reported in this region will be a major
challenge.
Big picture
Clearly, banks in California and the West have
experienced a significant increase in problem
real estate loans since the onset ofthe recession.
And, depending on the strength and timing of
the recovery, nationally as well as in this region,
problem loans could continue to rise until im-
proved business conditions are reflected in the
cash flows and on the balance sheets of banks'
borrowers. Certainly, recent actions by several
large western banks to boost loan loss reserves
in the second quarter suggest that a recovery
in asset quality will follow a normal pattern-
lagging a turnaround in the economy, rather
than moving with it.
Still, problem loan ratios suggest that real
estate loan deterioration has been less severe
in the West than in the nation as a whole or in
the depressed northeastern states. And, by com-
parison to the end of the 1982 recession, real
estate loan deterioration in this region has not
been so severe. Thus, while California may now
be an area of concern, at least through the first
three quarters of the recession, real estate loans
at the state's banks continued to outperform
the nation.
Gary C. Zimmerman
EconomistREGIONAL BANK DATA
HARCH 31, 1991
(Not Seasonal!y Adjusted, Preliminary Data)
DISTRICT ALASKA ARIZONA CALIF. HAWAII IDAHO NEVADA OREGON UTAH WASH•
-------- .._------ ---- ..--- ........---- ..--_ ......-
ASSETS AND lIA8lLITIES -. $ MILLION
ASSETS TOTAL 497,723 4,348 33,855 341,677 17,945 8,938 14,753 25,202 11,862 39,144
FOREIGN 37,956 1 N/A 35,855 1,865 N/A N/A 15 59 162
DOMESTIC 459,767 4,347 33,855 305,822 16,080 8,938 14,753 25,187 11,803 38,982
LOANS TOTAL 364,141 1,925 22,017 258,899 10,660 5,839 10,729 16,956 7,416 29,700
FOREIGN 33,605 6 N/A 32,163 1,293 N/A N/A N/A N/A 142
DOMESTIC 330,536 1,919 22,017 226.736 9,366 5,839 10,729 16,956 7,416 29,558
REAL ESTATE 163,044 758 7,080 124;314 4,708 1,674 2,606 6,200 2,899 12,805
COMMERCIAL 78,753 689 3,598 54,362 2,819 1,451 1,353 5,223 1,654 7,603
CONSUMER 57,515 287 4,458 31,870 1,255 1,656 6,267 3,462 2,067 6,192
AGR ICULTURE 5,332 4 408 2,676 18 605 15 402 142 1,063
INTERNATIONAL 179 N/A 10 169 0 N/A N/A N/A N/A 0
SECURITIES TOTAL 44,479 1,849 4,351 21,602 3,884 1,738 1,798 3,318 2,373 3,567
U.S.T.S. 12,723 929 1,299 5,939 1,362 393 556 651 471 1,122
SECONDARY MARKET 20,382 455 1,893 10,588 1,637 873 640 1,676 1,355 1,266
OTHER SEC. 11,374 465 1,159 5,075 884 472 602 991 547 1,179
lIA81L1T1ES TOTAL 464,465 3,834 31,431 319,807 16,857 8,347 13,585 23,219 11,049 36,336
DOMESTIC 426,509 3,833 31,431 283,953 14,992 8,347 13,585 23,204 10,990 36,174
DEPOSITS TOTAL 398,222 3,278 29,530 273,213 15,172 6,996 8,668 19,814 9,517 32,036
FOREIGN 34,864 0 N/A 32,865 1,681 N/A N/A 2 59 256
DOMESTIC 363,359 3,278 29,530 240,348 13,490 6,996 8,668 19,812 9,458 31,779'
DEMAND 77,063 874 4,541 54,946 2,185 1,182 1,956 3,158 1,668 6,552
TIME AND SAVINGS 286,296 2,404 24,989 185,402 11,305 5,814 6,712 16,654 7,790 25,227
NOW 35,423 247 2,721 22,237 1,343 828 959 2,457 1,199 3,433
MMDA 74,343 420 6,005 51,021 2,046 1,105 2,032 3,725 1,570 6,419
SAVINGS 33,354 411 2,046 22,357 1,530 438 1,216 1,556 871 2,929
SMALL TIME 86,114 722 12,096 47,606 1,819 2,798 1,389 7,001 3,337 9,347
LARGE TIME 56,750 582 2,107 42,039 4,565 641 1,115 1,888 807 3,006
OTHER 80RROWINGS 43,785 508 1,315 28,208 1,155 1,261 4,147 2,685 1,354 3,152
EQUITY CAPITAL 33,258 514 2,424 21,869 1,088 592 1,167 1,983 812 2,808
LOAN LOSS RESERVE 7,745 36 638 5,675 159 89 270 273 154 451
LOAN COMMITTMENTS 194,429 543 11,999 143,792 5,692 2,139 2,114 9,523 3,043 15,583
LOANS SOLD 35,515 11 356 34,293 54 42 96 363 30 271
LOAN LOSS RESERVE (ALL 8ANKS) 2.13 1.88 2.90 2.19 1.49 1.52 2.51 1.61 2.07 1.52
NET CHARGEOFFS, TOTAL 1.21 0.08 1.25 1.29 0.07 0.38 3.27 1.00 1.11 0.48
REAL ESTATE 0.36 -.04 1.30 0.32 0.01 0.05 0.03 0.52 0.68 0.37
COMMERCIAL 0.71 0.00 1.79 0.60 -.00 0.49 4.93 1.24 1.80 0.32
CONSUMER 2.57 0.66 1.91 2.95 0.52 0.69 4.41 1.35 1.63 1.09
AGRICULTURE -.28 N/A 2.12 -.88 -3.90 0.38 -.06 0.28 0.20 -.27
PAST DUE & NON-ACCRUAL, TOTAL 5.41 5.46 5.97 5.83 1.52 1.90 8.78 3.33 4.30 3.57
REAL ESTATE 5.66 5.16 10.40 5.82 1.42 2.10 3.51 4.00 6.39 4.62
COMMERCIAL 6.52 7.10 13.50 7.03 2.06 1.98 8.42 3.76 4.46 3.04
CONSUMER 3.88 2.81 1.67 3.49 2.25 1.63 11.40 1.66 2.47 2.20
AGRICULTURE 6.74 34.80 9.85 7.87 9.92 3.56 1.19 5.17 3.78 4.73
INCOME TOTAL 13,569 111 847 9,324 432 227 607 654 317 1,049
INTEREST 11,280 95 673 7,795 387 200 441 540 271 878
FEES & CHARGES 647 5 46 436 10 12 15 41 18 64
EXPENSES TOTAL 11,732 89 826 8,086 355 189 478 550 276 883
INTEREST 5,993 45 400 4,191 215 111 164 278 144 445
SALARIES 2,241 22 165 1,553 70 30 53 116 44 188
LOAN LOSS PROVISION 838 2 60 555 9 5 98 44 21 43
OTHER 2,661 20 200 1,788 60 43 163 112 67 207
INCOME BEFORE TAXES 1,830 22 21 1,230 78 38 130 104 41 166
TAXES 664 6 -3 488 28 13 32 33 15 52
NET INCOME 1,165 16 24 741 50 25 98 72 26 114
ROA (%) 0.95 1.46 0.29 0.87 1.12 1.17 2.68 1.19 0.88 1.18
ROE (%) 14.0 12.3 3.96 13.5 18.3 17.1 33.5 14.4 12.8 16.2
NET INTEREST MARG IN (%) 4.29 4.61 3.34 4.24 3.88 4.09 7.60 4.39 4.29 4.48
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 (Judith Goff) 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.OUI:'6 v:::> 'OJSpueJ:I ueS
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DEPOSITORY INSTITUTIONS REQUIRED TO HOLD RESERVES ~ITH THE FEDERAL RESERVE ON A ~EEKLY BASIS
PERCENT OF COMBINED MARKET TOTAL FOR MAY 1991, BY REGION
DISTRICT ALASKA ARIZONA CALIF HA~All IDAHO' NEVADA OREGON UTAH ~ASH
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
NO~
SAVINGS
MMDA
SMALL TIME
LARGE TIME
52 43 5
91 4 5
64 29 7
.51 32 17
65 33 2
34 63 3
4749 3
73 4 23
99 0 1
59 6 35
37 3 61
89 8 2
77 8 15
94 3 3
89 5 6
94 0 6
88 3 9
71 3 26
95 4 1
88 9 4
91 3 6
46 50 4
91 4 5
59 35 6
49 39 13
60 38 2
25 73 3
42 54 3
69 28 3
91 3 6
72 27 2
53 38 9
80 20 0
43 54 3
82 17 1
87 9 4
90 1 9
88 8 3
78 11 11
94 6 0
85 14 2
85 10 5
70 26 4
99 1 0
77 15 9
66 17 17
82 16 2
4948 3
6633 0
82 12 7
94 1 5
85 8 7
60 20 20
91 5 4
76 18 5
89 8 3
78 8 14
88 3 9
84 3 13
58 5 37
82 6 12
77 13 10
82 9 9
5636 8
91 5 4
65 23 12
44 20 36
6830 2
43 53 4
4752 1
CB = COMMERCIAL 8ANKS; 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 HA~AII IDAHO OREGON UTAH ~ASH
....---_....._---.....-----------_.__. __._--------_....----_......--_..._----_..._....._-_.-_......-..._--------...._----.------
MONEY MARKET DEPOSIT ACCOUNTS MAR91 5.58 5.52 5.33 5.65 5.29 5.63 5.31 5.58 5.43
APR91 5.46 5.41 5.17 5.55 5.29 5.61 5.25 5.52 5.30
MAY91 5.33 5.28 5.05 5.33 5.13 5.56 5.11 5.56 5.29
92 TO 182 DAYS CERTIFICATES MAR91 6.28 5.99 5.61 6.10 5.90 5.94 6.13 5.88 6.36
APR91 6.11 5.88 5.50 5.97 5.81 5.91 5.98 5.84 6.18
MAY91 5.91 5.78 5.46 5.83 5.64 5.89 5.85 5.73 6.01
2'1/2 YEARS AND OVER CERTIFICATES MAR91 7.04 6.66 6.30 6.83 6.95 7.03 6.68 6.73 6.91
APR91 6.95 6.68 6.30 6.88 6.95 7.05 6.89 6.74 6.84
MAY91 6.90 6.66 6.30 6.89 6.95 7.15 6.83 6.61 6.75
COMMERCIAL, SHORT'TERM" AVE. RATE 7.75 8.54 9.43 8.64 8.50 9.09 8.55 8.18 8.11
AVE. MAT. (DAYS) 47 153 167 188 162 135 102 78 118
COMMERCIAL, LONG-TERM" AVE. RATE 9.24 9.02 10.27 8.99 10.51 NfA 7.79 10.17 NfA
AVE. MAT. (MONTHS) 40 43 37 43 53 NfA 29 38 NfA
LOANS TO FARMERS" AVE. RATE 9.84 8.67 8.74 8.63 NfA 10.32 9.87 6.42 9.65
AVE. MAT. (MONTHS) 10 8 6 9 NfA 11 12 6 8
CONSUMER, AUTOMOBILE AVE. RATE 11.28 11.83 12.63 12.59 NfA 12.00 10.74 11.00 10.95
CONSUMER, PERSONAL AVE. RATE 15.16 15.14 16.50 19.27 NfA 12.50 13.90 15.51 12.38
CONSUMER, CREDIT CARDS AVE. RATE 18.22 18.50 18.00 18.82 NfA NfA 19.24 19.48 17.97
----_ .................... - ..-_..............................................................................-_....................................-_ ............ -_ ....-_ ........-_ ................-_ ....................-_ ..........
SOURCES: SURVEY OF TERMS OF BANK LENDING AND TERMS OF CONSUMER CREDIT; MOST COMMON INTEREST, RATES ON SELECTED ACCOUNTS.
" DATA ARE COMPOUNDED ANNUAL RATES.

Real estate loan problems in the West

http://www.frbsf.org/publications/economics/letter/1991/el91-27.pdf

Real estate loan problems in the West

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