Federal Reserve Bank of San Francisco

Fourth Quarter 2013: District Banks – Approaching Full Recovery

February 28, 2014

The First Glance 12L provides a first look at the financial performance and condition of banks headquartered within the 12th Federal Reserve District each quarter. The 4Q13 report, subtitled “District Banks – Approaching Full Recovery,” attempts to show how close economic and banking metrics are to “normal” levels (i.e., long-term non-recession averages). Based on strong progress made by banks, credit quality metrics appear to be about a year from recovering to “normal” levels assuming continuation of current trends. Average annual loan growth rose to a healthy 8% in 2013, also well on the way to long-term non-recession District norms of 12%-14%. Profitability, however, remained hampered by the low interest rate environment and many banks may no longer be able to benefit from “reserve releases” in 2014 and beyond. So a return to “normal” profitability looks to be a little further out into the future. Going forward, uncertainties regarding the direction and magnitude of interest rate changes pose additional risks. As rates rise, some banks may have to replace sharp outflows of non-maturity deposits with higher-cost deposit products or borrowings. Some may also experience delays in variable-rate loan repricing until loan rates rise above contractual floors. These factors could limit net interest margin expansion among otherwise asset-sensitive institutions. Rising rates will likely also reduce market values and thus liquidity within investment portfolios. Interest rate and other risks are discussed in the “Bank Supervisors’ Hot Topics” section of the report.

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