Ronald H. Schmidt

English

Research Papers in Economics

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 reces-
sion has been more severe in Southern California.
As a result, the smaller community banks oper-
ating 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 ofthe
recession within California by comparing the per-
formance 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, on-
going defense cutbacks, and soft real estate mar-
kets. 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 u.s. average
of 7.5 percent.
The severity of the economic downturn in Califor-
nia 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 pos-
itive during the first half of1992, with return on
assets (ROA) climbing to 0.54 percent; but bank
performance still lagged far behind the improve-
mentat the national level. ROA for the nation rose
to 0.92 percent for the first halfofthe year. Nation-
ally, 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 improve-
ment almost everywhere except California.
Southern California suffers
Much of the slowdown in the California econ-
omy 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
ofthe 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 subre-
gions. According to Coldwell Banker, as ofJune
1992, vacancy rates for commercial office space
in metropolitan areas were near or above the
national average of 19.4 percent in eachof the
Southern California markets. In the Central Val-
ley, 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 isparticularly impor-
tant. 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
ofJune 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 Western Banking is a quarterly review of banking
developments in theTwelfth Federal Reserve District. It is published in the Weekly Letteron the fourth Friday
ofJanuary, April,July, and October.Percent
8
7
6
5
4
3
2
1
o
1992 1991 1990 1989 1988
Chart 1
Problem Real Estate Loan Ratio
for Community Banks
Central
Valley
~ ~; ~~, ..
.••••.•••••, •••/ \.';.,... .'"•• ••••••• *:?:. ••\"
-'" ::••......:.:',..,., / "
"" " '" ••..••.....// ....,.,.., .,..,
...... 'N~rthern'" .-..... ;',.1,:",,,,,,,,
California
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, Riv-
erside, San Bernardino, San Diego, and Ventura
Counties), with 222 community banks; the sec-
ond is the San Francisco Bay Area (Alameda,
Contra Costa, Marin, San Francisco, San Mateo,
Santa Clara, Solano, Sonoma, and NapaCounties),
with 74 community banks; the third is the Cen-
tral Valley (Fresno, Kern, Sacramento, and San
Joaquin Counties), with 31 community banks.
FRBSF
Gary C. Zimmerman
Economist
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 lasttwoyears. Southern California'scommunity
banks have experienced more loan quality prob-
lems and have suffered more earnings deteriora-
tion 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
ofthe decade, as some analysts have suggested,
argue against a quick improvement in the impor-
tant Southern California banking market.
Percent
r1.6
~ 1.4
~ 1.2
1.0
0.8
0.6
0.4
0.2
----'---+ 0.0
1992
• Southern California
oCentral Valley
! Northern California
1990 1991
First Half of Year
1989
Chart 2
Return on Assets
for 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 con-
struction 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 com-
munity banks' total loans are for construction
and commercial real estate. The comparable
ratio for all California banks is only 25 percent.
The worst deterioration in real estate loan quality
in the three subregions has taken place at South-
ern 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 con-
sumer installment loans also are the highest in
Southern California.
Return on assets data shown in Chart 2 for the
three California subregions emphasize the de-
terioration of community bank performance in
Southern California from prerecession levels. For
example, ROA forthe first halfof1992wasadismal
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,REGIONAL BANK DATA
JUNE30, 1992
(NOT SEASONALLYADJUSTED, PRELIMINARY DATA)
DISTRICT ALASKA ARIZ. CALIF. HAWAII IDAHO NEVADA OREGON UTAH WASH.
LOANS TOTAL 347.006 2.oll'3 19;114 239;174 13_ 6.854 9,135 17,_ 6,760 30,G16
FOREIGN (RESIDUAl) 29,223 3 0 27,824 1,345 0 0 0 0 51
DOMESTIC 317.763 2,090 19,414 211,650 12.oll'3 6,854 9,135 17,996 6,760 29,965
FiEALESTATE 167,913 69'i 7.ifi 124,994 6,912 2,058 2,679 6.866 3,309 12,929
COMMERCIAL 66,107 716 2,596 43,314 3,190 1,529 666 4.637 1.676 7,579
CONSUMER 56.713 336 5,375 29,457 1.150 1,616 5.1n 3,611 3,176 6.615
AGRICULTURE 5,965 6 372 2,941 44 604 15 491 154 .1.136
INTERNATIONAL 92 0 7 84 0 0 0 0 0 0
SECURITIES TOTAL 61,296 1_ 6.734 33,332 4,260 1.nl 2,366 3,827 3.135 3.957
U.S.T.S, 20,020 619 2,272 9,975 2.030 423 1,266 1,112 636 1,_
SECONDARY MARKET 29,862 570 3,590 17,n5 1,644 845 655 1,625 1,749 1,229
OTHER SEC. 11,394 505 871 5,562 565 503 445 690 751 ',262
LIABILITIES TOTAL 464,176 3,963 32,347 312,364 19,816 6,971 12,974 23,496 12,850 37,376
DOMESTIC 435,164 3,963 32,347 265,515 17,626 8.971 12,974 23,496 12,743 37,311
DEPOSITS TOTAL 403,741 3,420 29,849 274,304 15,579 7,494 9,197 19,972 10,457 33,462
FOREIGN (RESIDUAL) 27,874 0 0 25,228 1,787 0 0 0 106 751
DOMESTIC 375,868 3,419 29,649 249,076 13,791 7,494 9,197 19,972 10,359 32,711
DEMAND 66,736 973 5,573 61,110 2,210 1,291 2,246 3,859 1,934 7,540
TIME AND SAVINGS 289,130 2,446 24,275 187,967 11,581 8,203 6,950 16,112 8,425 25,171
NOW 39,407 302 3,166 24,216 1,494 927 1,143 2,950 1,393 3,_
MMDA 91,276 518 7,832 93,893 ',997 1,422 2,321 4,156 1,851 7,_
SAVINGS 41,622 609 2,568 26,652 2,807 n6 1,536 1,943 1,273 3,469
SMALLTIME n,251 512 9,210 44,465 2,162 2,495 1,132 6,094 3,138 8.043
LARGE TIME 39,127 475 1,ffl9 28.530 3,119 592 816 927 ns 2,224
OTHER BORROWINGS 38_ 520 1,995 20.131 3,665 1,378 2,929 2,872 2,189 2,602
EQUITY CAPITAL 37_ 801 2.951 23.452 1.512 706 1.481 2.239 1.199 3.420
LOAN LOSS RESERVE 10,457 41 562 7,_ 221 100 369 467 217 625
LOAN COMMITTMENTS 188.939 602 19,206 126,203 5.909 2,480 1,796 9,446 6,817 16,480
LOANS SOLD 27,591 6 156 23,715 225 25 40 = '"
3,140
AL
INTEREST 172
FEES & CHARGES 11
EXPENSES TOTAL 19,647 152 1,251 13,473 706 348 751 982 574 1,410
INTEREST 7,388 60 472 4,966 379 188 166 365 240 551
SALARIES 4,248 46 288 2,915 158 61 88 258 100 334
LOAN LOSS PROVISION 2,241 5 96 1,714 31 19 152 74 56 94
OTHER 5,no 42 395 3.878 138 100 343 284 178 431
INCOME BEFORE TAXES 2,993 57 53 1,595 192 88 288 253 130 337
TAXES 1,166 17 27 706 69 30 96 85 43 111
NETINCOME 1,607 40 39 878 122 59 190 167 87 226
ROA{%) 0.75 1.78 025 0.54 1.16 1,22 2.59 1.37 128 1.17
ROE{%) 9.62 13.31 2.62 7,47 16.18 16.52 25.68 14.96 14.59 13.24
NET INTEREST MARGIN (%) 4,40 4.97 3.62 4.30 4.02 4.34 7.94 4.n 4.88 4.34
NET CHARGEOFFS. TOTAL 1.04 0,29 125 1.11 0,22 0.37 3.18 0.73 0.98 0.49
REAL ESTATE 0.59 0.05 1.11 0.69 0.07 0.03 0.50 0.16 0.32 0.07
COMMERCiAL 0.98 0.58 3.23 0.99 0.31 0.58 0.36 1.17 0.94 0.59
CONSUMER 3.14 0,38 1.66 4.07 0.90 0.57 5.14 1.58 1.92 1.13
AGRICULTURE 0.09 0.00 0.14 -0.13 0.00 0.56 0.00 0.12 1.33 0.23
PAST DUE & NON·ACCRUAL, TOTAL 6.19 4.43 4.55 724 2.15 ~07 5.89 3,85 2.97 4.23
REAL ESTATE 7.75 5,47 7.05 8.60 2.39 2,49 7.38 5.02 3.68 6.93
CONSTRUCTION 18.58 11.39 22,29 19.52 7.36 6.55 13.96 12,44 3.14 19.81
COMMERCIAL 8.15 6.04 10.84 9.43 1,24 324 6.58 5.n 4.54 4.00
FARM 8.03 0.00 29,49 8.36 10.94 5.65 0.00 1.67 9.88 2.70
1-4 FAMILY REV 1.13 0.61 0.66 124 0.89 021 0.58 0.64 0.88 0.78
1-4FAMILYOTHER 2.74 2.13 2.65 2.97 2.23 125 3.39 1,49 2.09 1.70
MULTI·FAMILY 7.93 128 12.90 8.56 0.69 1.53 31.74 7.90 0.75 3.92
COMMERCIAL 6.70 3.96 8.99 7.68 2.15 2.17 7.97 4.71 3.59 3.42
CONSUMER 328 2,45 2,41 3.90 2.07 1,41 5.14 1.50 2.07 1.93
AGRICULTURE 5.56 0.00 6.99 8.72 1,44 3,22 1,31 4,44 3.13 4.34
NUMBER OF BANKS 756 8 38 459 19 20 18 49 54 91
NUMBER OF EMPLOYEES 243.154 2,632 19,514 157,142 8,312 4,791 5,935 15,571 7,108 22,149
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 orto 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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PERCENT OF COMBINED MARKET TOTAL FOR AUGUST 1992, BY REGION
D1SmtCT ALASKA ARIZONA ~ 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 54 40 72 4 24 92 0 7 4ll 4S 5 f57 27 6 92 5 3 73 24 3 80 11 9 78 8 14 56 35 9
DEMAND 91 4 98 0 2 96 0 4 90 5 5 89 4 7 95 0 5 97 3 0 94 1 5 89 4 6 90 6 4
NOW 64 28 60 6 34 89 0 11 58 35 6 f57 30 3 94 3 3 78 18 6 84 8 8 83 4 13 64 24 12
SAVINGS & MMDAS 60 32 56 4 40 90 0 10 56 38 6 60 32 8 93 4 3 82 14 4 76 11 13 71 6 23 51 26 17
SMALLTIME 33 64 75 9 17 95 1 5 24 73 3 50 47 3 89 10 1 42 65 3 76 18 8 78 15 7 39 56 4
LARGE TIME 47 45 94 2 4 94 0 6 41 50 9 82 15 4 89 6 5 62 38 0 75 12 13 72 10 17 49 49 2
CB=COMMERCIAL BANKS; SL • SAVINGS & LOANSAND SAVING BANKS; CU _ CREDIT UNIONS; MAY NOTSUM TO 100'1', DUE TO ROUNDING
TVPEOFACCOUNTORLOAN DATE US DISTRICT ARIZ CAUF HAWAII IDAHO OREGON UTAH WASH
SAVINGS ACCOUNTS AND MMDAS"" JUN92 3,53 3,66 3,23 3,52 3,90 4,03 3,43 3.79 3.63
JUL92 3.24 3.36 2.96 3.14 3.54 3.77 3.16 3.55 3,43
AUG 92 3.14 3.28 2.83 3.08 3.40 3.69 3.14 3.42 3.39
92 TO 182 DAYS CERTIFICAIES JUN92 3.78 3.74 3.40 3.55 4.05 3.80 3.55 3.91 3.97
JUL92 3.45 3.40 3.08 3.26 3.17 3.56 3.37 3.64 3,68
AUG 92 3.36 3.34 3.03 3.23 3.17 3.39 3.37 3.55 3.58
2-1/2 YEARS AND OVER CERTIFICATES JUN92 5.39 5.16 4.47 4.95 5.63 5.81 5.03 5.42 5.43
JUL92 5.02 4.78 4.32 4.52 4.78 5.56 4.97 5.03 4.79
AUG 92 4.87 4.75 4.40 4.29 4.78 5.41 5.05 4,94 4,75
COMMERCIAL, SHORT TERM" AVG. RATE 5.13 6.16 7.14 6.03 6.77 N/A 6.40 4.12 6.17
AVG, MAT. (DAYS) 59 90 183 172 102 N/A 137 18 32
COMMERCIAL, LONG-TERM" AVG. RATE 6.50 7.73 7.92 8.25 N/A N/A N/A 8.75 N/A
AVG. MAT. (MONTHS) 45 32 25 26 N/A N/A N/A 53 N/A
LOANS TO FARMERS" AVG,RATE 8.31 6.76 6.81 6.73 N/A 7.78 6.47 8.17 7.14
AVG. MAT. (MONTlHS) 17 16 7 16 N/A N/A 18 61 11
CONSUMER, AUTOMOBILE AVG. RATE 9.15 9.39 9.90 9,24 N/A 10.50 8.79 8,50 9.41
CONSUMER, PERSONAL AVG. RATE 13.94 13.77 13.75 13,77 N/A 11.00 12.26 16,00 12.81
CONSUMER, CREDIT CARDS AVG. RATE 17.66 18.36 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 JULY 1992

Regional comparative advantage

http://www.frbsf.org/publications/economics/letter/1993/el93-37.pdf

Regional comparative advantage

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