Federal Reserve Bank of San Francisco

FRBSF Economic Letter

1996-14 | April 26, 1996

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Record 1995 for Western Banks

Gary Zimmerman and Deanna Brock

Economic conditions in most of the District were healthy in 1995, and that helped District banks generate record profits. Employment growth expanded even more rapidly in the District than in the nation; in fact, of the nine District states, five–Nevada, Utah, Oregon, Arizona, and Idaho–ranked in the top ten for nonagricultural employment growth. Even California’s employment growth rate outpaced the nation’s. The strong economic conditions boosted demand for bank loans, stimulated bank growth, and improved asset quality.

This Letter details District bank performance and discusses the regional economic conditions that influenced it in 1995.

Record earnings abound

In 1995, industry earnings nationally climbed to a record $48.6 billion (from $44.4 billion in 1994) and return on assets (ROA) climbed to a near-record 1.15 percent (from 1.13 percent in 1994). District banks as a group also broke records. Their profits hit a record $7.9 billion in 1995 (from $6.4 billion in 1994) and their ROA rose to a record 1.39 percent (from 1.21 percent in 1994). In addition, in the second half of 1995 noninterest expenses were reduced and performance enhanced by the large cuts in FDIC deposit insurance premiums.

Looking at performance on a state-by-state basis reveals that California banks earned over $4.7 billion and their ROA climbed to 1.33 percent, out-performing the nation for the first time since 1991. Elsewhere in the District, in the aggregate banks in Nevada, Oregon, Washington, and Alaska all reported ROAs of 1.50 percent or better. The remaining four District states all recorded moderate earnings, with ROAs in the 0.90 to 1.10 percent range. Even though overall asset quality remained sound in Arizona, Idaho, and Utah, those states saw increases in problem loan ratios and related higher expenses for loan loss provisions, which dampened earnings. The slowdown in Idaho’s growth rate and Hawaii’s weak economy also were clearly reflected in bank performance.

Loan growth boosts earnings

An 8 percent expansion of bank assets, both for the District and for the nation, was an important source of earnings growth in 1995. For the District, that represented the fastest rate of asset growth since 1989. Federal Reserve surveys noted increased demand by business borrowers to finance inventories and invest in equipment, although some banks also noted increases in borrowing by large firms for merger and acquisition financing.

Despite more rapid employment growth in 1995, loan growth at District banks lagged behind the nation. U.S. banks’ total loans and its three main domestic components, real estate, commercial, and consumer loans, grew at rates of 9 percent or better in 1995. While District banks reported comparable growth rates to the nation for commercial and consumer loans, real estate loans outstanding were stagnant as a result of a decline in mortgage loans at California banks. Some of the weakness may reflect increased securitization of fixed-rate mortgages and flat real estate markets in the state.

Net interest margins: mixed

Interest rates declined over most of 1995–for example, one-year Treasury Bill rates fell by 183 basis points from December 1994 to December 1995–and that had mixed effects on bank performance. In the nation and in California, net interest margins declined by 8 and 13 basis points, respectively, as competition to extend credit kept downward pressure on margins and thus reduced bank earnings on their loan portfolios. However, in Alaska, Arizona, Nevada and Utah, states which had stronger than average loan growth, net interest margins showed sizable improvements in 1995, increasing 24 basis points or more above 1994 levels. Banks in these states were able to increase the yield on their assets while holding down the increases in their cost of funds. These states also reported the most rapid growth in relatively high-yield consumer loans.

Favorable asset quality

Robust economic growth also improved bank asset quality in several District states in 1995. By year-end problem loan ratios for total loans had stabilized at under 2.5 percent for the District and the nation; this is the lowest level since these data were first collected in 1983. For both the District and the nation these ratios are about half of their level prior to the 1990-1991 recession. Many District banks’ strong asset quality allowed them to hold down expenses for generating provisions against future loan losses; these expenses remained low, at $2.2 billion for the region. This was their second lowest level in the past ten years.

California banks’ asset quality continued to improve through 1995, and by year-end it approached the level for the District as a whole for the first time since 1990. Banks in Oregon and Washington posted very low ratios of problem loans, a situation that contributed to record profitability in both states. Although problem loan ratios in Arizona, Idaho, and Utah were comparable to or better than District ratios in 1995, they still showed noticeable deterioration from 1994. Banks in these three states as well as Nevada reported increases of 0.50 percentage points or more in 1995 for problem loan ratios for total loans, and as a group, Arizona, Nevada, and Utah banks also reported large increases in problem consumer loans. These states all have at least one large “credit card” bank with a regional or national customer base. As a result, in each of these states banks have a high share of consumer and credit card loans in their portfolio; in fact, in Nevada, nearly three-quarters of all bank loans are consumer loans (compared to 19 percent nationally).

For the District as a whole, banks also experienced a deterioration in consumer asset quality in 1995 (Figure 1). Problem loan ratios rose for residential mortgages, and problem consumer loans, which include credit card debt, jumped 74 basis points, reaching 3.17 percent at year-end 1995. Still, this number is well below the peak of 3.88 percent reached after the 1990-1991 recession.

At the national level, banks reported increases in problem loan ratios for various types of consumer debt, including credit card loans and other consumer loans, as well as home equity lines of credit and home mortgages. This deterioration, however, was more than offset by reductions in overall problem commercial real estate and business credits. As a result, U.S. banks’ earnings set new records in 1995.


The region’s strong economy and the combination of favorable loan growth and a relatively low level of overall asset quality problems in 1995 set the stage for sound growth for the western banking industry in 1996. One area of concern, however, is consumer loan quality: it deteriorated markedly in 1995, both nationally and regionally. Further erosion of consumer loan quality in 1996 could lead to a downturn in overall asset quality, and therefore it bears careful monitoring.

Gary C. Zimmerman

Deanna L. Brock
Research Associate

Opinions expressed in FRBSF Economic Letter 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. This publication is edited by Sam Zuckerman and Anita Todd. Permission to reprint must be obtained in writing.

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