Federal Reserve Bank of San Francisco
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Third Quarter 2014: Loan Growth Accelerated but Earnings Remained Muted

December 1, 2014

The First Glance 12L provides a first look at economic performance and the financial condition of banks headquartered within the 12th Federal Reserve District. The 3Q14 report, subtitled “Loan Growth Accelerated but Earnings Remained Muted,” shows the continued dichotomy between earnings performance and loan growth among 12th District banks. Profits remained pressured by the low interest rate environment, while strong job gains (and potentially looser underwriting) contributed to above-average loan growth. In dollar terms, nonfarm-nonresidential and commercial and industrial loans led the increase. That said, expansion within smaller segments like multifamily and construction mortgages contributed disproportionately to overall loan growth because of their high segment-level growth rates. Allowances for loan and lease losses did not quite keep pace with loan portfolio increases; however, they improved in relation to a shrinking base of problem credits. Rising interest rates remain a forward risk relative to depositor behavior and securities market values. It is uncertain to what extent the surge of non-maturity account balances will recede as interest rates increase. In addition, assets may be slower to re-price in a rising rate environment because of banks’ ongoing shift towards longer-dated loans and securities. Although examination ratings trends demonstrated an overall improvement in bank performance, institutions still faced numerous operational and other challenges, some of which are summarized under the “Hot Topics” section.

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