In Northwest, Clouds Expected To Blow Over

A sharp rise in loan problems at Oregon's two biggest banks signals the end of the Pacific Northwest's banking boom. But there is no evidence yet that the region will become another industry trouble spot.

Portland-based U.S. Bancorp and the Oregon unit of First Interstate Bancorp. Los Angeles, this month disclosed unusually large loan-loss provisions and big increases in nonperforming assets.

U.S. Bancorp's troubles are still modest: The addition it is making to reserves, about $40 million, will lower quarterly profits 13%.

First Interstate's problems are more severe. It will make whopping $95 million provisions, resulting in a quarterly loss of about $40 million.

These actions reflect a tough stance by regulators, observes say. The continuing resilience of the Northwest economy, they say, may let the region's banks avoid a deep slump.

Credit Quality Stable

Though banks in Washington, Oregon, and Idaho are reporting a sharp drop in loan demand, credit quality has stayed relatively stable. "Banks in the Pacific Northwest appear to be holding up better than those in other parts of the country," said Norman Jaffe, an analyst with Fox-Pitt, Kelton Inc.

Supported by a rising population and vibrant trade, technology, and aircraft manufacturing sectors, the Northwest economy has been one of the country's most robust in recent years.

As a result, banks in Washington, Oregon, and Idaho have grown faster and been more profitable than those in most other regions. Even as their counterparts elsewhere saw earnings plunge, northwestern banks continued to build their balance sheets and register strong earnings.

Strong Returns

In the first quarter of 1991, for example, the combined return on assets was 1.18% for Washington banks and 1.19% for Oregon banks, compared with 0.87% for California banks, according to Federal Reserve data.

The national recession has put a halt to the Northwest's rapid economic growth, however. The forest products industry - still a mainstay, despite economic diversification - is in a slump, more because of lower demand for building material than of the spotted owl dispute. Construction and retail sales have also turned down.

Growth in nonfarm jobs, which was running above 4% a year in the region, has flattened. But economic activity and employment are still rising, although more slowly than in the recent past.

The Washington, Oregon and Idaho economies "have continued to perform reasonably well - they haven't been hit like California's" said Gary C. Zimmerman, an economist with the Federal Reserve Bank of San Francisco.

Loan Volume Affected

For banks, the most notable effect has been in loan volume. In Washington, for example, total assets grew 14% in 1989 but only 1.6% in the 12 months that ended this March 31.

"We're not going to have the asset increases we've had in recent years," said Gene Schultz, an economist with West One Bancorp, Boise, Idaho.

Most Northwest bankers say that their loan portfolios remain healthy.

"Looking ahead, we don't see any deterioration in Washington credit quality," said Don G. Vandenheuvel, president of Puget Sound Bancorp, Tacoma. Puget Sound will record a higher loan-loss provision and larger loan writedowns for the second quarter, but these are to cover loan problems outside the Northwest, Mr. Vandenheuvel said.

Commercial Realty

In particular, most Northwest banks don't have heavy exposure in nonresidential real. Though Seattle has surplus office space, there has been little speculative building in other markets. "There is not a big inventory of land or Class A office space on bank books," said R. Jay Tejera, analyst in Seattle with Dain Bosworth Inc.

Nevertheless, the problems at U.S. Bancorp and First Interstate have cast a shadow over the Northwest.

Analysts say the two institutions are reacting to a crackdown by the Office of the Comptroller of the Currency. "In both instances, the banks are aligning themselves with a tougher regulatory attitude," said Mr. Jaffe.

U.S. Bancorp was telling analysts as recently as mid-June that it foresaw no big rise in nonperforming assets. But bank officials say the Comptroller's office has forced the classification of a number of real estate and commercial credits that are still current on interest and principal.

Regulatory Scrutiny

The second-quarter provision reflects, among other things, "keen scrutiny by regulatory agencies" said Roger L. Breezley, U.S. Bancorp's chairman and chief executive. The provision does not signal "a deteriorating regional economy," he said in a statement.

First Interstate is acting in advance of a scheduled summertime examinatin by the Compatroller's office. The parent company is also implementing a companywide toughening of credit standards, officials said.

A hard line from regulators is a a familiar story to bankers in California and the East. But there, the weakness of the underlying economies largely vindicated the tough supervisory stance.

If the Northwest continues to avoid the downturn, earnings should recover rapidly, analysts predict.

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