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Each depositor insured to at least $250,000 per insured bank

Home > Industry Analysis > Research & Analysis > San Francisco Regional Outlook - Second Quarter 1998

San Francisco Regional Outlook - Second Quarter 1998

Regular Features

Current Regional Banking Conditions

  • The Region's commercial banks and thrifts posted their strongest results in more than a decade at year-end 1997.
  • Agricultural lending, which is prevalent in almost 60 percent of the Region's banks, may become more volatile as government payments decline and some export markets react negatively to the Asian crisis.
  • Higher risk real estate concentrations in some of the Region's newly chartered banks warrant attention, especially in Nevada, where some real estate indicators are showing signs of a slowdown.

Region's Insured Institutions Report Strong Profits

Banks and thrifts in the San Francisco Region finished 1997 with the strongest earnings, lowest nonperforming loan ratios, and highest capital levels in over a decade. Despite the Region's above-average exposure to the financial turmoil in Asia, the slowdown there thus far has had only a minor impact on the health of the Region's economy and financial institutions (see Strong Growth Is Expected to Continue in the San Francisco Region despite Potential Fallout from the Asian Crisis).

  • Return on assets (ROA) at the Region's banks and thrifts mirrored national returns of 1.19 percent for the 12 months ending December 31, 1997, which is significantly above the 1996 ROA of 0.95 percent. Lower deposit insurance premiums1 coupled with slightly higher trust fee income and noninterest income from foreign operations offset a contraction of net interest margins and a slight uptick in loan loss provision expenses at the Region's insured institutions.

1 A special assessment on SAIF-assessable deposits, including those held by Savings Association Insurance Fund members and Bank Insurance Fund-member Oakar institutions, was imposed in 1996 to capitalize the SAIF at its target Designated Reserve Ratio of 1.25 percent of insured deposits. The one-time special assessment of 65.7 basis points was applied against SAIF-assessable deposits held by institutions as of March 31, 1995, and had a significant effect on 1996 earnings for institutions that paid the special assessment.

  • The ratio of past-due loans (loans past due 30 or more days plus nonaccrual loans) to total loans at the Region's insured institutions dropped to 1.97 percent of total loans, well below the national average of 2.27 percent. The decline reflected improvement in most loan categories throughout the Region. Consumer loan portfolios are, however, still showing signs of weakness (see Chart 1). Community banks and thrifts (defined here as non-credit-card banks and thrifts with total assets of less than $1 billion) in two of the Region's underperforming states--Montana and Hawaii--and three territories--American Samoa, Guam, and Micronesia--did buck the Region's trend by reporting increases in past-due ratios at year-end.

Chart 1

  • Excellent earnings continue to bolster capital levels, despite a 79 percent dividend payout ratio. The aggregate tier 1 leverage ratio for the Region's insured institutions is now 7.71 percent; for institutions with assets under $1 billion, the ratio is 9.50 percent.

Agricultural Lending Is Prevalent throughout the Region

The health of the agriculture sector significantly influences the performance of agricultural loans in financial institutions throughout the Region. Although the Region has only 20 percent of the total U.S. population, it accounts for over 28 percent of the nation's agricultural production. California leads the nation in agricultural production, but Arizona, Hawaii, Idaho, Oregon, Montana, and Washington also are among the nation's top ten producers of several agricultural products.

At year-end 1997, banks and thrifts in the Region had $7.4 billion in outstanding agricultural production loans and another $2.2 billion in loans secured by farm real estate. Almost 60 percent (461) of the banks in the Region were involved in farm lending, 133 of these 461 banks had over 100 percent of tier 1 capital in agricultural loans. Of these agricultural or farm banks, 131 can be described as community farm banks, institutions with assets of less $1 billion dollars.2 The average assets of these 131 community farm banks was just under $100 million. The number of farm banks in the San Francisco Region declined 23 percent between 1991 and 1997; over half of the reduction occurred in Montana, where a 1989 change in the state's mergers and acquisition's banking law spurred merger activity.

2 For this article, the 131 agricultural (or farm) banks are defined as institutions with total assets under $1 billion (community banks) and with agricultural loans (agricultural production loans and real estate loans secured by farm properties) that constitute over 100 percent of tier 1 capital. Two banks with over $1 billion in assets also report agricultural loans that constitute over 100 percent of tier 1 capital, but they are typically analyzed with comparably larger peers.

Most of the farm community banks are in the northern part of the Region and in California's Central Valley, as shown in Chart 2. The number of community banks with agricultural lending concentrations is significant in Montana, Idaho, and Wyoming, where farm banks account for 56 percent, 44 percent, and 42 percent of total banks in each state, respectively.

Chart 2

In addition to agricultural lending by community banks with concentrations in farm lending, four of the nation's top ten agricultural lenders, ranked by agricultural loans outstanding, are located in the San Francisco Region. These four large banks have assets ranging from $8 billion to over $200 billion. They have multiple branch offices in farming communities, and as a group they account for over one-half of the Region's agricultural loans. Their dominance in this market contrasts sharply with the situation elsewhere in the nation, where the bulk of agricultural loans are provided mostly through farm community banks, which typically have average assets of less than $100 million. Two factors that contribute to the Region's agricultural lending patterns are the average size of the farms and the value of the products sold per farm, both of which are about twice the national average. In Arizona and California, the value of the products sold per farm in 1996 was almost three times the national average. The borrowing needs of these larger farms can exceed the legal lending limits of the state's smaller community banks.

1997 Was a Good Year for the Region's Farm Banks

As a group, the Region's farm banks recorded a strong performance in 1997. ROA for farm banks with less than $1 billion in assets edged up to 1.24 percent as an increase in overhead expenses was offset by higher net interest margins. Favorable asset quality also helped maintain farm bank performance. The past-due ratio (30 days or more and nonaccrual loans) to total farm real estate loans fell from 3.01 percent at year-end 1996 to 2.58 percent at year-end 1997 for farm banks with less than $1 billion in assets. The past-due ratio for loans to finance agricultural production also remained low for these banks, although the past-due ratio climbed from 0.21 percent at year-end 1996 to 0.39 percent at year-end 1997. Despite excellent earnings, tier 1 leverage capital ratios at farm community banks declined from 9.68 percent at year-end 1996 to 9.50 percent of total assets on December 31, 1997, because of strong asset growth. The loan growth was almost evenly split between agricultural production loans and real estate loans secured by farm properties.

Farm Bill and Asian Crisis Mean Challenges Ahead

Notwithstanding the general good health of the farm banks, the Region's agricultural lenders may face two key challenges in the coming year. The first is the 1996 Farm Bill. Under this bill, price supports have been replaced by a series of income payments that are being phased out over a seven-year period ending in 2002. Now farmers will base expected crop returns on market prices rather than on a guaranteed target price, thus exposing agricultural producers and consequently their lenders to new price risks. The legislation likely will result in increased price volatility for commodities because most producers are now free to determine the type of crop they wish to grow and the amount of acreage they wish to allocate. The financial transition will be greatest for farmers with the most dependence on government payments--generally wheat, cotton, and mixed-grain farmers. In the San Francisco Region, Montana's farmers may be most affected by the 1996 Farm Bill, as they are currently the most reliant on government cash payments, as shown in Table 1.

Table 1

Montana Farmers Rely Most on Government Subsidies
for Their Agricultural Cash Receipts
Farm Financial Indicators
Government Payments as
    % of Cash Receiptsa













Percent of Ag Cash
    Receipts from Exportsa













Farm Debt-to-Equity Ratioa
Farm Debt-to-Assets Ratioa2.0%8.3%18.8%4.5%18.3%12.9%7.2%12.0%8.7%15.9%11.4%nana
Net Farm Income Change:
    '95 to '96a













Percent w/ Farming as
    Principal Occupationa













Statistics on Bank Lending to Farmers
# of Community Ag Banksb0119075307319221312947
Community Ag Banks as a
    % of All Banksb













Average Community Ag
    Bank Size ($ in millions)b













Community Ag Banks--Past-
    Due Farm Loan Ratiob,c













Large Banks--Past-Due
    Farm Loans Ratiob,d













Ag Loans as % of Tier 1













Note: na=not applicable
aSource: U.S. Department of Agriculture
bSource: Bank Call Reports 12/31/97
cCommunity Ag Banks are banks with total assets under $1 billion and all agricultural loans that constitute over 100 percent of tier 1 capital.
dLarge Banks have assets of $1 billion or more.
eAgricultural loans here are defined to include both agricultural production loans and loans secured by farm real estate.

The Asian crisis is the second area that warrants additional monitoring in 1998 for its potential effects on the farm sector. Agricultural exports nationwide average about 30 percent of farm cash receipts. In 1997, $24 billion or approximately 41 percent of the total value of U.S. agricultural exports were shipped to Asia. The five most troubled Asian economies--Indonesia, Malaysia, the Philippines, South Korea, and Thailand--account for 12 percent of U.S. farm exports. Japan and Taiwan, which did not experience sharp devaluations in 1997, account for an additional 25 percent. The U.S. Department of Agriculture (USDA) is projecting that U.S. agricultural exports will fall 2 percent below 1997 levels and more than 6 percent below 1996 levels because of weaker Asian demand, increased competition, and lower prices.

Farmers in the San Francisco Region are disproportionately exposed to the turmoil in Asia for two reasons: First, two of the top ten agricultural export states in the country--California and Washington--are in the San Francisco Region; California alone accounts for more than 20 percent of total U.S. agricultural exports. Second, a high percentage of the Region's exports go to Asia. Over half of California's agricultural exports go to Asia, and selected markets like the state's Central Valley ship as much as 80 percent of their cattle and cotton production to Asia. Chart 3 summarizes the major commodities in the Region that are most vulnerable to the projected reduction in exports to Asia.

Chart 3

Furthermore, world markets affect the value of commodities consumed domestically. Consequently, some agricultural products that are not exported directly to Asia nevertheless are being affected by the financial turmoil. For example, cattle and calves are the leading products in Wyoming, accounting for 60 percent of the state's agricultural cash receipts. However, beef exporting countries like Australia and Canada now are having difficulty selling beef in Asia, and the strong dollar has made the United States a very attractive market. While USDA economists believe that Japan will continue to import two-thirds of all U.S. beef exports, U.S. cattle production is expected to decline in 1998 because of rising imports and declining exports. The rising domestic supply may affect the cash receipts and the health of the ranching industry directly.

Implications: In the coming year, both the 1996 Farm Bill and the emerging Asian crisis will affect agricultural products and prices in the San Francisco Region. Although the 1998 price outlook for major crops and livestock products--for example, beef, cotton, and wheat--are stable to slightly down, prices could be greatly undermined if economic conditions in Asia deteriorate any further. Clearly, conditions in the agricultural sector will affect the performance of farm lenders as well.

Despite the consolidation that has already occurred in Montana, farm banks in that state still may have higher than normal risk exposures. Montana's agricultural sector has a high dependence on government subsidies, as shown in Table 1. Reductions in those subsidies will increase the risk agricultural producers face from changing market conditions and may increase the importance of risk management for both farmers and farm lenders. This could be particularly important in Montana, because the farm banks in that state have an agricultural loan concentration ratio of over 300 percent of capital, the highest in the Region (see Table 1).

USDA can provide additional information on farm sector conditions. Those interested in topics such as crop prices, stages of planning, special research papers, and production forecasts may go to the USDA homepage at and the USDA Statistics Service homepage at

Industry Consolidates amid Rising Chartering Activity

In 1997, the arrival of nationwide interstate banking sparked merger activity throughout the Region, although many of these mergers represented consolidations of banks already operated by large multistate bank holding companies. By year-end 1997, the number of mergers and consolidations within the Region totaled 80, well above the 1996 tally of 65. Noteworthy interstate acquisitions were led by the acquisition of Great Western Bank, which is a federal savings bank with $42 billion in assets located in California, by Washington Mutual Savings Bank, which is headquartered in Seattle, Washington. Many of the 1997 mergers involved affiliated institutions, as large bank holding companies in the Region took advantage of the new interstate banking laws to merge some of their out-of-state, and in some cases out-of-Region, bank subsidiaries into their lead bank. The latter transactions shifted reported bank assets into the Region. By contrast, the acquisition of U.S. National Bank of Oregon by an out-of-Region bank shifted the reporting of over $30 billion in assets out of the San Francisco Region. More recently, the proposed interstate merger between BankAmerica, headquartered in San Francisco, and NationsBank, of Charlotte, North Carolina, would continue the consolidation trend by creating the largest commercial bank in the nation.

Industry consolidation and healthy economic growth have been catalysts for new chartering activity in the San Francisco Region. In 1994, only two thrift charters and five commercial bank charters were issued, a record low. The number of insured financial institution charters tripled in 1995 to 21, edged up to 25 in 1996, and then accelerated to 37 in 1997. As a result of this increased chartering activity, financial institutions that are three years old or less now account for 20 percent or more of the banks and thrifts in Nevada, Arizona, Idaho, and Utah (see Chart 4).

Chart 4

Newly chartered financial institutions face a variety of challenges, not the least of which is to establish a profitable, well-balanced loan portfolio. Loan officers of new institutions, especially those located in some of the Region's faster growing states, are facing stiff competition not only from large well-established institutions, but also from other newly chartered banks. Because they are located in rapidly expanding markets, some of these new institutions may develop loan portfolios that are relatively concentrated in certain types of loans, rather than being well diversified across a variety of loan types. For example, as seen in Chart 5, higher risk real estate loans account for over 33 percent of total assets at Nevada's new insured institutions, compared with just 19 percent and 11 percent for the Region and the nation's new institutions, respectively. This heavy concentration may place these institutions at risk from the effects of an economic downturn.

Chart 5

Implications: According to the FDIC's History of the Eighties report on banking problems, " new banks failed more frequently than existing banks, and banks that subsequently failed had significantly more of their assets in higher risk real estate loans." Although the San Francisco Region continues to enjoy robust economic conditions, newly chartered institutions, especially fast-growing banks with concentrations in higher risk real estate loans, may be among those institutions that are most at risk from the effects of an economic downturn. Thus, these institutions may warrant close attention from bank management and regulators.

Catherine I. Phillips-Olsen, Regional Manager
Roger Stevens, Financial Analyst

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Last Updated 7/26/1999

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