California Banks Lagged Behind Rest of West in Second Quarter
SAN FRANCISCO - Western banks marched to two different drummers in the second quarter. California banks slumped, but in most other parts of the West performance was at least fair.
In the Golden State, where most western banks are located, bad loans and a tough stance by regulators hammered earnings in the second quarter. Some Oregon and Nevada banks also had weak results.
But banks in Arizona, Washington, Hawaii, and the Rocky Mountain states showed reasonably stable credit quality and generally higher profits than in the same period last year.
"It was difficult to characterize the West in the second quarter because of the difference in the performance of California banks on the one hand and Rocky Mountain banks on the other," said Norman Jaffe, an analyst with Fox-Pitt, Kelton Inc.
Since California dominates the region, western banks as a group were among the country's poorest performers in the second quarter. The median return on assets for western regionals was 0.69%, compared with 0.65% in the East, the worst-performing region, according to the brokerage firm Keefe, Bruyette & Woods Inc.
Aggregate earnings of western banks were down 6.8% from the second quarter of 1990, the worst decline of any region, Keefe Bruyette calculated. The results are a real comedown for the region, which until this year was the country's most profitable.
The West's performance is likely to remain schizophrenic. With California's economy stagnant and its commercial real estate market glutted, no quick turnaround is in sight, analysts said.
In California, lenders were "feeling the impact of an increase in problem assets and their inability to generate good loans," said Gerry Findley, an independent banking analyst in Brea, Calif. "In the third quarter, problems will probably be worse than in the second quarter."
Recession Over for Some
But most of the rest of the West has either resisted the recession or already experienced it. Real estate collapsed several years ago in Arizona, Utah, and Colorado; those states are now on the rebound. Hawaii and Washington have remained more or less healthy.
In the West "you've got a number of economies that are not doing too badly," said Lawrence R. Vitale, an analyst with Kemper Securities Group Inc. "I'm especially impressed with the resilience of the Northwest, the problems of a few banking companies notwithstanding."
Tough banking conditions in California largely reflect the sharp real estate downturn, especially in the Los Angeles area. Conditions are similar to, though not as severe as, those that rocked Arizona, Texas, and New England.
A harsh regulatory regimen has compounded the underlying economic problems, observers say. "The regulatory agencies are very, very focused on California," said Larry D. Kurmel, executive director of the California Bankers Association. "The general reaction is, |These guys are tough.'" [Tabular Data Omitted]
Forced Loss Provisions
Regulatory fingerprints are evident in the results of four of the region's largest banks - Security Pacific Corp., Wells Fargo & Co., First Interstate Bancorp, and U.S. Bancorp. Following examinations by the Office of the Comptroller of the Currency, the companies recorded big second-quarter loan-loss provisions and chargeoffs. Bottomline results were well below the level of the year-earlier period.
Ominiously, provisions and writedowns focused on leveraged buyout credits and other commercial loans, as well as real estate outside California. For the three big California banking companies, the biggest hits on commercial real estate in the Golden State may be still to come.
Other California banks fell into two categories. BankAmerica Corp., Union Bank, and such smaller institutions as Westamerica Bancorp, San Rafael, and Silicon Valley Bancshares managed to increase earnings over year-ago levels despite rising credit problems.
But institutions such as City National Corp., Beverly Hills; Imperial Bancorp, Los Angeles; and Pacific Western Bancshares, San Jose, saw earnings plunge due to bad loans. Bank of California, the second-largest Japanese-owned bank in the United States, lost $183 million in the quarter after recording a $200 million provision mainly for real estate losses.
Portland-based U.S. Bancorp wrote off $31.8 million in loans and added $40 million to loss reserves in the second quarter, up 64.2% and 85.1% respectively over the same period last year.
But the Northwest's biggest banking company may engineer a quick turnaround. It has proportionately less commercial real estate on its books than the big California banks, and Oregon's economy has held up well.