FEDERAL DEPOSIT INSURANCE CORPORATION FIRST QUARTER 1997
 

FDIC
 

SAN FRANCISCO
 

REGION
 

DIVISION OF
 

INSURANCE
 

CATHERINE I.
 

PHILLIPS-OLSEN,
 

SENIOR REGIONAL
 

ANALYST
 

GARY C. ZIMMERMAN,
 

REGIONAL ECONOMIST
 

In Focus This Quaitei
 

• Consumers Declare Bankruptcy in Record Numbers - Despite 

favorable economic conditions, consumers are declaring bankruptcy in record numbers in the San Francisco Region. The increases in both personal bankruptcy filings 

and consumer credit losses are part of a national trend which has the attention of 

industry participants, regulators, and Congress. See page 3. 

• New Tax Benefits for Owners of Community Banks - The 

Small Business Job Protection Act of 1996 allows closely held banks, thrifts and 

holding companies to take advantage of various pass-through benefits of the subchapter “S” corporation tax structure. These benefits are potentially substantial and may 

increase the inherent value of community banks. See page 6. 

• Savings Association Insurance Fund (SAIF) Capitalized - After more than two years of hard work by regulators, Congress, and the banking and 

thrift industries, the Deposit Insurance Funds Act of 1996 was passed to address the 

serious problems of the SAIF. See page 9. 

Regu[ai Featuies
 

+Regional Economy +Financial and +Regional Banking 

 Commodity Markets 

· Rapid Job Growth · Interest Rates · Overall Conditions 

· Six Star States · Bond Values · Operating Performance 

· California Rebounds · Bank Stocks · Credit Card Lending 

· So. California Soft · New Products · Loan Survey 

· WY & AK Lag Behind · Commodities · Construction Lending

 See page 12 See page 17 See page 21 

A Publication of the Division of Insurance For Internal Use Only 

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Dear Reader, 

The prototype edition of the Regional Outlook for the San Francisco Region is attached. The Regional Outlook is 

produced by the Division of Insurance (DOI) and is designed to discuss events and trends affecting insured depository institutions in your region. This publication will be produced and distributed quarterly in our effort to share information and work with the Divisions of Supervision (DOS) and Compliance and Consumer Affairs (DCA) to identify emerging risks to insured depository institutions. 

The publication contains two sections. The first section, In Focus This Quarter, contains several articles which are 

designed to address significant issues affecting insured depository institutions. The articles are not intended to represent an exhaustive coverage of the subject matter or to be examination guidance. The second section, Regular Features, will focus on the Regional Economy, Financial and Commodity Markets, and Banking. This section is not intended to be a substitute for your local or national newspaper but is intended to address some emerging trends and 

relate them to insured depository institutions. 

This publication is regional in focus with individual states and metropolitan areas highlighted where possible. We 

recognize the importance of local economic information to examiners and intend to address that particular need more 

thoroughly in another product. DOI will provide periodic economic analyses at the Field Office level in the future. 

This publication may be distributed on a wider basis in the future, but it was designed largely with an examiner audience in mind. DOI is very appreciative of the time and constructive feedback members of DOS’s and DCA’s 

Chicago staffs provided in the design and testing of the Regional Outlook. Many of the suggestions received from 

those individuals were incorporated into this publication. Your comments on the publication’s format and contents, 

including suggestions for future articles, are welcomed. We also would appreciate your thoughts about the desirability of providing this publication by way of our intra-net homepage, or some other electronic format. 

Sincerely, 

Arthur J. Murton 

Director 

The Regional Outlook is published quarterly by the Division of Insurance of the Federal Deposit Insurance Corporation, 550 17th Street N.W., 

Washington, D.C. 20429. Visit the Division of Insurance online at http://fdic01/division/doi/. For more information on this publication, please call 

Catherine I. Phillips-Olsen at (415) 974-4247 or email her at Catherine I. Phillips-Olsen@DOI@San Francisco. 

The views expressed in the Regional Outlook are those of the authors and do not necessarily reflect official positions of the Federal Deposit Insurance 

Corporation. Some of the information used in the preparation ofthis publication was obtained frompublicly available sources and is considered reliable. 

However, its use does not constitute an endorsement of its accuracy by the Federal Deposit Insurance Corporation. 

Ricki Helfer, Chairman, Federal Deposit Insurance Corporation 

Arthur J. Murton, Director, Division of Insurance 

Editorial Board	 George E. French, Deputy Director 

Stephen Linehan, Assistant Director, Analysis Branch 

Ronald L. Spieker, Chief, Depository Institutions Analysis Section 

Maureen E. Sweeney, Special Assistant to the Director 

Design and Production	 Steven E. Cunningham, Senior Financial Analyst 

Diane Ellis, Senior Financial Analyst 

The authors wish to acknowledge the assistance provided by Don Inscoe and Jon Wisnieski of the Division of Research and Statistics in providing 

some of the data used in this publication. Any errors are the responsibility of the authors. We would also like to thank the employees of the Division of 

Supervision and Division of Compliance and Consumer Affairs in the Chicago Region for providing feedback used in the development and design of 

this publication. 

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In Focus This Quarter
 

Consumers Declare Bankruptcy in Record Numbers 

Trend Raises Concerns about Consumer Credit 

• 	 Despite favorable economic conditions, personal 

bankruptcy rates are rising throughout the San 

Francisco Region. 

• 	 Three states in the San Francisco Region, 

Nevada, California, and Oregon, are among the 

ten states with the highest per capita bankruptcy 

rates in the country. 

• 	 Credit card charge-offs are approaching recession levels. 

Despite favorable economic conditions, consumers are 

declaring bankruptcy in record numbers in the San 

Francisco Region. The increases in both personal 

bankruptcy filings and consumer credit losses are part of 

a national trend which has the attention of industry 

participants, regulators, and Congress. Both the Senate 

and House Banking Committees have held hearings on 

the condition of consumer credit, particularly credit 

card lending. Much of the concern regarding these 

trends is due to the fact that bankruptcy filings and 

charge-offs are rising despite low unemployment and 

rising income levels. 

What Is Occurring in the San Francisco Region? 

Chart 1 shows the rising trend in consumer loan losses 

in the San Francisco Region as well as the close relationship between these losses and personal bankruptcy 

CHART 1

filings. In states such as Utah, Arizona, and Nevada, 

where large credit card banks are located, there is less 

correlation because the loan portfolios are more geographically diverse. 

Table 1 (next page) shows that personal bankruptcy 

rates are rising in all states throughout the Region. 

Current levels are high when compared to other states in 

the U.S., with six states in the Region exceeding the 

average per capita filing rate for the nation. Nevada 

topped the Region’s list despite its lower than average 

ratio of debt to disposable income. Alaska continues to 

have a very low rate despite high unemployment. A 

recent study by SMR Research Corporation suggests 

that Alaska is a special case because physical access to 

a bankruptcy court is difficult for many due to distance. 

Why Are Consumer Credit Losses Rising in an 

Expanding Economy? 

The emergence of consumer credit problems during an 

expanding economy is not unprecedented. During the 

last economic expansion, consumer delinquency and 

charge-off rates also rose. Consumer debt tends to rise 

when employment rises because households are more 

willing to incur debt and banks are more willing to lend. 

Chart 2 shows that past cycles of rising growth in 

consumer credit have been followed by rising delinquency rates, even during periods of expansion. 

CHART 2

Personal Bankruptcies Correlate with 

Consumer Loan Charge-offs in the Region 

Filings 

(000s) 

4.0% 80 

3.0% 60 

2.0% 40 

Gross Charge-off Rates 1.0% 20 

0.0% 0 

91 92 93 94 95 96 

Sources: Administrative Office of the United States Courts and Bank 

and Thrift Call Reports (RIS). Based on a design by the FDIC's Division 

of Research and Statistics. 

U.S. Consumer Delinquency Rate Tends to 

Rise After Credit Growth Accelerates 

ABA Composite % Change in 

Delinquency Rate Consumer Loans 

30% 2.7% 

2.5% 20% 

2.3% 10% 

2.1% 

0% 1.9% 

1.7% -10% 

80 82 84 86 88 90 92 94 96 

Sources: American Bankers Association and Federal Reserve Flow of 

Funds 

Regional Outlook	 3 First Quarter 1997 

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In Focus This Quarter
 

As the expansion closes out its sixth year, American 

consumers are holding historically high levels of consumer debt -- the ratio of total consumer debt service 

payments, including mortgage, to disposable personal 

income is approaching record highs and is currently at 

17 percent. High debt levels appear to be the result of 

several years of economic expansion along with credit 

card companies’ intensive efforts to generate and feed 

consumers’ appetite for credit. Consumers and their 

lenders are now experiencing the after-effects of this 

credit expansion. California and Hawaii have the highest levels of debt to disposable income in the region. 

However, SMR attributes Hawaii’s debt level to high 

housing costs. 

Why Are Bankruptcy Rates Rising? 

Nonbusiness bankruptcy filings for 1996 will exceed 

one million for the first time in U.S. history. This level 

is 11 percent higher than the peak in the last recession 

and a 14 percent increase over 1995 filings. A variety 

of theories have been advanced to explain this trend. 

These theories include: 

• 	 Consumers have overextended themselves. 

• 	 Recent changes in bankruptcy laws make it easier to 

shield assets from creditors. 

• 	 Changes in legal practices promote bankruptcy. 

• 	 The social and financial repercussions associated 

with bankruptcy have diminished. 

In fact, the trend is likely the result of several factors, 

TABLE 1

many of which are interrelated. 

SMR’s study attributes differences in filing rates more 

to state regulations than to economic conditions. The 

study found that bankruptcy is driven by the number of 

and exposure to catastrophic events. Specifically, in 

four states in the Region with the highest bankruptcy 

filings per capita, California, Nevada, Washington, and 

Oregon, SMR attributes a high filing rate to a high 

divorce rate. SMR also attributes Oregon’s and Washington’s high filing rate to a high self-employment rate. 

Small business failures often lead owners to declare 

personal bankruptcy. The report identifies other factors 

driving up bankruptcy rates such as: 

• 	 inadequate health insurance; 

• 	 inadequate auto insurance; 

• 	 garnishment of wages; and, 

• 	 high debt-to-income ratios. 

All of these conditions increase consumers’ exposure to 

catastrophic events, such as job loss, that are typically 

associated with personal bankruptcy. 

Of interest to lenders is that some traditional early 

warning signs of trouble -- such as erratic missed 

payments or paying off a smaller share of outstanding 

balances -- are not evident this time. Some banks are 

finding that obligations due to them are being wiped 

out in bankruptcy court on accounts that showed no 

prior problems. 

Implications for Insured Institutions 

BANKRUPTCY RATES PER THOUSAND PERSONS

ALASKA

ARIZONA

CALIFORNIA

HAWAII

IDAHO

MONTANA

NEVADA

OREGON

UTAH

MASHINGTON

MYOMING

UNITED STATES

1991 1992 1993 1994 1995 3RD QTR

1996

ANNUAL.

3RD Q 96

STATE

RANKING

0.22 0.20 0.18 0.17 0.19 1.59

4.75 4.72 4.05 3.52 3.55 4.28

4.17 4.78 4.58 4.17 4.27 5.31

0.90 1.10 1.12 1.22 1.58 2.27

3.80 3.37 2.95 2.67 3.21 4.12

2.36 2.16 2.00 2.02 2.44 2.92

5.28 5.63 5.36 4.64 4.78 6.13

4.46 4.33 3.95 3.83 4.24 4.94

4.20 4.22 3.52 3.34 3.63 4.36

3.20 3.36 3.03 3.08 3.65 4.88

3.09 2.58 2.33 2.26 2.35 3.46

3.46 3.52 3.15 3.00 3.33 4.15

50

17

6

47

19

37

4

9

16

11

27

NA

SOURCE: BANKRUPTCIES • ADMINISTRATIVE OFFICE OF THE UNITED STATES COURTS

 POPULATION • CENSUS BUREAU

Regional Outlook	 4 First Quarter 1997 

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In Focus This Quarter
 

These trends have raised concerns about the outlook for 

credit card lenders. As shown in Chart 3, credit card 

charge-offs are approaching levels not seen since the 

aftermath of the 1990-1991 recession. During that 

recession, charge-off rates increased sharply. The question arises whether there would be a similar sharp 

increase in credit card losses during a future recession, 

driving credit card loss rates to levels well above their 

previous peak. 

This concern is heightened by a number of factors. 

Consumer debt burdens are at historic highs. Profit 

margins for the nation’s specialty credit card lenders 

(institutions whose total loans exceed 50 percent of 

managed assets and whose credit card loans exceed 50 

percent of total loans) have rapidly narrowed from a 

4.25 percent quarterly return on assets (ROA) in the 

third quarter of 1994 to a 2.02 percent quarterly ROA in 

the third quarter of this year. Competitive pressures on 

pricing and underwriting remain intense, as some companies continue aggressive card solicitations, and there 

are few signs of any slackening of price competition. A 

sharp rate cut for AT&T credit cards, one of the largest 

credit card lenders, is a recent salvo in this price 

competition. Lenders also place great reliance on 

credit scoring models that have not yet been tested in 

a recession and, according to a recent Federal Reserve 

survey, appear overly optimistic in almost two-thirds of 

the banks surveyed. 

Other factors mitigate these concerns to some extent. 

Pricing of credit card loans has traditionally built in a 

margin of comfort for high and volatile losses. Loan 

portfolios are diversified with many small loans to 

individuals. There are preliminary indications that 

lenders and borrowers are retrenching to some extent. 

Consumer credit growth slowed from over 14 percent in 

both 1994 and 1995 to an annualized rate of 8 percent 

(seasonally adjusted) for the first ten months of 1996. In 

CHART 3
 

2.5 

3.0 

3.5 

4.0 

4.5 

5.0 

8687888990919293949596 

Source: Federal Reserve Board 

U.S.Credit Card Charge-Offs Are 

Approaching Levels Not Seen 

Since the Last Recession 

Recession 

the Federal Reserve survey just mentioned two-thirds of 

banks reported raising the score an applicant must 

achieve to qualify for credit, and one-third reduced 

credit limits for existing customers. 

Generalizations about the outlook for credit card lending 

are difficult. Trends that describe the industry on 

average may not hold true for particular institutions. 

Performance is likely to vary substantially, with results 

depending on the risk management practices and underwriting standards of each institution. Given the trends 

outlined above, credit card lending practices appear 

worthy of continued close attention by bankers and 

regulatory agencies. 

Diane Ellis, Senior Financial Analyst 

Maj-Brit Melugin, Division of Resolutions 

and Receiverships 

Regional Outlook 5 First Quarter 1997 

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In Focus This Quarter
 

New Tax Benefits for Owners of Community Banks 

Subchapter “S” Benefits Now Available 

• 	 Potential benefits are substantial. A layer of tax 

expense has been eliminated. 

• 	 Eligibility is restricted and requires care to maintain. 

• 	 While no application to the banking agencies is 

required, the new tax structure has supervisory 

implications. 

• 	 The new tax structure has some potential drawbacks. 

Introduction 

The Small Business Job Protection Act of 1996 allows 

closely held banks, thrifts and holding companies to take 

advantage of various pass-through benefits of the subchapter “S” corporation tax structure. These benefits 

are potentially substantial and may increase the inherent 

value of community banks. 

TABLE 1

Eligibility Is Restricted 

The new law allows, for the first time, financial institutions including banks, thrifts, and holding companies to 

elect subchapter “S” status if they meet several criteria. 

The most important of these requirements are that the 

company not use the reserve method of accounting for 

bad debts for tax purposes and that it have 75 or fewer 

eligible shareholders. All shareholders must consent to 

the subchapter “S” election and the IRS must consent to 

any change in the tax accounting for bad debts. To be 

able to receive the benefits for tax year 1997, institutions therefore may need to act quickly since changes in 

either of the above areas may be time consuming. 

Reserve accounting for bad debts for tax purposes is an 

issue affecting only smaller institutions. Currently, 

reserve accounting is allowed only for those thrifts and 

banks under $500 million in assets that are not part of a 

group with more than $500 million in assets. To elect 

the new tax status, the subchapter “S” company will 

need to make the accounting change to the specific 

charge-off method for tax purposes. Presumably, the 

NUMBER OF BANKS IN THE REGION WITH

UNDER $100 MILLION IN TOTAL ASSETS

NATIONAL NON•MEMBER STATE

MEMBER

TOTAL

ALASKA 1 0 0 1

ARIZONA 3 8 4 15

CALIFORNIA 56 96 15 167

HAWAII 0 6 0 6

IDAHO 0 6 1 7

MONTANA 18 37 33 88

NEVADA 2 9 2 13

OREGON 1 15 6 22

UTAH 3 20 5 28

MASHINGTON 15 40 0 55

MYOMING 12 7 21 40

TOTAL 111 244 87 442

SOURCE: PRELIMINARY BANK CALL REPORTS AS OF 9•30•96

Regional Outlook	 6 First Quarter 1997 

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In Focus This Quarter
 

IRS will not object to any such change, which can 

delay deductions and increase taxable income, and 

will allow the change to be effective as of the beginning of the tax year. 

In relation to shareholder eligibility, ownership of 

subchapter “S” corporations is limited to individuals, 

estates, and a few types of trusts. At present, certain 

shareholders, such as corporations, Employee Stock Ownership Plans (ESOPs) 

and other stock bonus plans, may not hold 

shares in subchapter “S” corporations. 

Once the subchapter “S” election is taken, 

the corporation and its shareholders must 

take care to continue to meet all eligibility 

requirements or risk losing the tax benefits. 

Industry observers 

have suggested that 

over 1,000 banks 

nationwide will make 

the subchapter “S” 

election. 

fair market value of all company assets 

exceed the adjusted tax bases of these 

assets, there may be some corporate tax 

liability if any assets are later sold. Assets held on conversion date and sold 

Number of Eligible Institutions 

While exact figures on the number of eligible institutions are not available, the number of small banks may 

provide insight into where the tax election may be 

seen. As Table 1 (next page) shows, there are about 

442 commercial banks in FDIC’s San Francisco Region with under $100 million in assets. It is expected 

that a large percentage of these companies would meet 

the eligibility requirements. Industry observers have 

suggested that over 1,000 banks nationwide will make 

the subchapter “S” election. 

Benefits to Shareholders 

The tax benefits of the “S” corporation are similar to 

those of a partnership. The earnings of the corporation 

generally are not taxed at the corporate level but pass 

directly to shareholders’ personal income. As such, 

cash distributions to shareholders are not subject to 

an additional layer of taxation, which results in a 

reduction in overall taxes. Shareholders remain 

liable for personal taxes on their proportionate share 

of the corporation’s taxable income. Distributions 

formerly paid directly to the IRS by the institution 

generally would be made to the shareholders, providing them with the funds to pay income taxes on their 

share of the corporate income. An interagency letter, 

FIL-91-96 dated October 29, 1996, notes that these 

distributions will be treated as dividends by the regulatory agencies. Adding value and flexibility to the 

“S” corporation structure is the ability to wholly own 

other “S” corporations. These rules allow holding 

companies and their bank or savings association subsidiaries to be “S” corporations. 

Other Tax Liabilities 

For bank or thrift companies that elect to convert to 

“S” corporation status, there are potentially some 

other corporate tax liabilities for unrealized gains accumulated through the date of 

conversion. As an example, should the 

within the next ten years require a calculation for “Built-in Gains Tax” (BIG tax) to 

determine any tax at the corporate level. 

Supervisory Implications 

While an application to bank regulators is not required 

for this tax election, there may be a rise in various 

“phantom bank mergers” or change-in-control applications as companies work to meet shareholder number requirements or attempt to get the required 100 

percent shareholder approval. 

Shareholders may enter agreements that place limits 

on their ability to sell their stock. In addition, the 

mechanics of a conversion will require some special 

expertise for the bank in tax law and accounting. The 

change from the reserve method to the specific chargeoff method for bad debts or the existence of net 

operating losses may present unique circumstances for 

each institution. 

Bank portfolios also may undergo changes prompted 

by shareholders’ requests. An example might be 

increased purchases of tax-free securities to meet the 

desires of shareholders for more tax-free interest. 

Another may arise from a tendency to remove accumulated earnings to pay personal taxes as the corporation 

generates earnings. This could place a strain on 

capital when growth is strong or delinquent assets are 

rising. 

Other Drawbacks 

To receive the benefits of the subchapter “S” election, 

Regional Outlook 7 First Quarter 1997 

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In Focus This Quarter
 

the institution will need to meet all the eligibility ments to fund debt payments on stock loans. 

requirements for every day of the tax year. Furthermore, the IRS has not yet resolved all the tax issues 

related to the subchapter “S” election on the part of New Value for the Community Bank Charter 

financial institutions. Specific guidelines from the 

IRS are expected by year-end 1996 which may affect Overall, this newly legislated tax break for closely- an institution’s decision to elect subchapter “S” status. held financial institutions may invigorate the value of 

the community bank or thrift. However, it The states of Connecticut, Michigan, New also adds a new “wrinkle” in the comHampshire, New Jersey, Tennessee as plexity of the examiner’s job. While con- well as the District of Columbia do not There may be a rise in 

solidation trends can be expected to con- recognize the federal subchapter “S” elec- various “phantom 

tinue at larger companies, the new tax tion. Therefore, these jurisdictions do not bank mergers” or 

benefits available for closely-held institu- allow the pass-through benefits of the “S” change in control 

tions add a new incentive for the survival applications as the corporation for the applicable state or of community banks and thrifts. companies work to district taxes. meet shareholder 

number requirements Subchapter “S” institutions remain under or attempt to get the the same capital adequacy standards and required 100 percent dividend restrictions as other institutions. 

However, there are times when it may be shareholder approval. Ronald L. Spieker, Chief, difficult to maintain the subchapter “S” Depository Institutions Analysis Section status. An example would arise when an * 

institution needs to raise capital to meet Prompt Corrective Action (PCA) guidelines. To meet the IRS 

requirements for subchapter “S” election while 

raising the necessary capital, current shareholders 

may have to be the primary source of new capital. 

The ability to raise additional capital by attracting For More Information new eligible shareholders may be difficult because the 

total number of eligible shareholders must remain 75 Subchapter S Election for Federal Income Taxes. or fewer to preserve the “S” status. Furthermore, no FIL-91-96. new classes of stock may be issued. Violation of any 

of these criteria would result in the loss of the subchapter “S” status and reversion to regular corporate 

tax rules. 

Distributions to shareholders are covered by similar * Extensive review and comments were provided by Robert F. Storch, restrictions for subchapter “S” corporations as for Chief, Accounting Section of the Division of Supervision. 

regular corporations. However, one possible new 

twist is that, in some cases, the tax liability payment 

for shareholders may be due before distributions are 

funded from the institution. However, this is considered similar to pressures brought by shareholders in 

other corporations when they require dividend payRegional Outlook 8 First Quarter 1997 

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In Focus This Quarter
 

Savings Association Insurance Fund (SAIF)

 Capitalized
 FDIC Lowers Assessment Rates 

• 	 SAIF was capitalized through a $4.5 billion 

special assessment. Over 150 banks and 

thrifts in the San Francisco Region paid $1.4 

billion of this total. 

• 	 Bank Insurance Fund (BIF) members will bear 

part of the cost of the Financing Corporation 

(FICO) bonds beginning in 1997. 

• 	 The special assessment negatively affects 1996 

operating performance, but earnings prospects 

are greatly enhanced by a proposal to lower 

future SAIF assessment rates. 

Why Was Action Needed? 

After more than two years of hard work by regulators, 

Congress, and the banking and thrift industries, the 

Deposit Insurance Funds Act of 1996 (Act) was 

passed to address the serious problems of the SAIF. 

The difficulties facing the SAIF were substantial and 

demanded a solution. They primarily fell into the 

following areas: 

TABLE 1

• 	 SAIF was undercapitalized and there was concern that one large, or several sizable, thrift 

failures could quickly deplete the fund balance. 

Its balance was $3.9 billion, or 0.55 percent of 

insured deposits, on June 30, 1996, well below 

the target reserve ratio of 1.25 percent of insured 

deposits. 

• 	 Over 45 percent of Over 56 percent of 

SAIF assessments the San Francisco 

were being diverted Region’s 

from the SAIF to pay institutions paying 

off FICO obligations the special arising from the thrift assessment posted a failures of the 1980s. quarterly net 

operating loss for 

• 	 The SAIF assessment the third quarter of base continued to 

shrink, with a 22 percent reduction noted from year-end 1989 to June 

of 1996. 

• 	 Disparity between SAIF and BIF premiums created strong economic incentives for institutions to 

SAN FRANCISCO REGION INSTITUTIONS AFFECTED BY SPECIAL ASSESSMENT

NUMBER OF INSTITUTIONS

AFFECTED AND TOTAL

ASSESSMENT BY TYPE

MUTUAL SAVINGS S&L STATE NATIONAL

BANKS MEMBER

NON• TOTAL

MEMBER

ALASKA 0 0 1 0 0 0 1

ARIZONA 0 2 0 0 2 1 5

CALIFORNIA 0 44 28 1 7 14 94

GUAM 0 0 2 0 0 0 2

HAWAII 0 2 3 0 0 0 5

IDAHO 0 1 3 0 0 0 4

MONTANA 0 5 4 0 0 0 9

NEVADA 0 1 0 0 0 1 2

OREGON 0 4 4 0 0 2 10

UTAH 0 1 2 0 0 0 3

MASHINGTON 9 3 8 0 1 2 23

MYOMING 0 3 1 0 1 2 7

TOTAL 9 66 56 1 11 22 165

ASSESSMENT ($000S) 57,516 920,374 265,994 253 67,910 45,998 1,358,045

SOURCE: DERIVED FROM EARLY ESTIMATES FROM THE FDIC'S DIVISION OF FINANCE.

Regional Outlook	 9 First Quarter 1997 

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In Focus This Quarter
 

transfer SAIF-assessable deposits to affiliated institutions insured by the BIF, contributing to the 

shrinkage in the SAIF assessment base. 

What Significant Actions Were Taken? 

Special Assessment: In order to address the immediate 

problems, the Act required the FDIC Board of Directors to impose a special assessment of approximately 

65.7 basis points on SAIF-member institutions. The 

special assessment was designed to increase the fund’s 

level to 1.25 percent of insured deposits effective October 1, 1996. In determining the amount, the Board: 

• 	 Exempted weak and other specifically defined institutions from paying the special assessment. 

• 	 Decreased by 20 percent the amount of SAIFassessable deposits against which the special assessment will be applied for certain Oakar and 

other institutions. (An Oakar institution is a member of one insurance fund that has acquired deposits 

insured by the other fund. The acquired deposits 

retain coverage under the seller’s fund.) 

Early estimates are that there will be fewer than 

fifteen exempted institutions in the San Francisco 

TABLE 2

Region. This number of exempted institutions is small 

compared with the estimated 160-170 institutions in the 

Region that paid about $1.4 billion to the SAIF in 

November. As Table 1 (previous page) indicates, the 

special assessment affects more than just thrifts. This is 

due to the substantial number of banks that have acquired SAIF deposits through acquisitions or branch 

purchases over the last few years. 

FICO Costs: The recently enacted legislation also 

addressed another legacy of the problems thrifts experienced in the 1980s -- FICO bonds issued in 1987 to help 

shore up the former Federal Savings and Loan Insurance 

Corporation (FSLIC). The cost of financing this debt, 

about $800 million per year, was a major reason the 

SAIF had not improved as quickly as the BIF. 

The Act authorized FICO to impose periodic assessments on BIF members in addition to members of SAIF 

that were already being assessed. The FICO charge on 

BIF-assessable deposits must be one-fifth the charge on 

SAIF assessable deposits. As a result, the FICO 

charge on SAIF-assessable deposits for the first semiannual assessment period of 1997 will be 6.48 basis 

points (annualized), and the charge on BIF-assessable 

deposits will be 1.30 basis points (see Table 2). As 

necessary, FICO rates will be adjusted on a quarterly 

basis to reflect changes in the assessable-deposit bases 

for the BIF and the SAIF. Beginning on January 1, 2000, 

or, when the insurance funds merge, whichever occurs 

Regional Outlook 10 First Quarter 1997 

earlier, BIF and SAIF members will share the FICO 

assessment on a pro rata basis. (FICO assessments will 

be paid in addition to the deposit insurance assessments. 

See discussion below.) 

Final Rule to Lower SAIF Assessment Rates: With 

the SAIF now capitalized by the special assessment, the 

FDIC Board lowered the rates on ongoing assessments 

paid to the SAIF. The FDIC Board also widened the 

spread between the lowest and highest rates to improve 

the effectiveness of the FDIC’s risk-based premium 

system. 

The final rule establishes an adjusted SAIF rate schedule of 0 to 27 basis points effective for all non-exempt 

institutions beginning January 1, 1997. (Since only 

SAIF-member savings associations must, by law, pay 

for FICO assessments until the end of 1996, a special 

interim rate was established for SAIF-member savings 

associations for the last quarter of 1996.)

 As is noted in Table 2, institutions exempted from 

paying the special assessment will not benefit initially 

from the lower SAIF assessment rates. They will pay 

according to the 23- to 31-basis point schedule through 

year-end 1999, unless they choose to make a pro rata 

SUMMARY OF 1997 ASSESSMENT

RATES *

1997 ADJUSTED BIF & SAIF SCHEDULE

CAPITAL SUPERVISORY SUBGROUP

GROUP A B C

1 0 3 17

2 3 10 24

3 10 24 27

EXEMPT INSTITUTION SAIF SCHEDULE

1 23 26 29

2 26 29 30

3 29 30 31

FICO ANNUAL RATES

BIF INSTITUTIONS SAIF INSTITUTIONS

1.30 6.48

* CENTS PER $100 OF DOMESTIC DEPOSITS

SOURCE: FDIC'S DIVISION OF INSURANCE

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In Focus This Quarter
 

payment of the special assessment in the interim. 

Implications for Insured Institutions 

Institutions that are required to pay the SAIF special 

assessment should have accrued a liability and an offsetting noninterest expense as of September 30, 1996. 

As a result, many such institutions will reflect much 

lower operating earnings this year. In fact, over 56 

percent of the San Francisco Region’s institutions that 

paid the special assessment posted a quarterly net operating loss for the third quarter of 1996 primarily due to 

the special assessment. 

Concerns over the short-term financial impact described 

above are moderated by much brighter future prospects. 

First, the special assessment is a one-time charge and 

should not affect future earnings streams of nonexempt 

institutions. Second, the proposed lower SAIF assessment rates should actually help to boost net income in 

1997. Finally, some observers have noted that the 

resolution of the SAIF’s deficiencies should remove 

uncertainties that may have depressed stock prices of 

SAIF-member institutions. Over the longer-term, the 

capitalization of the SAIF and the change in assessment 

rates also pave the way for a dialogue about a possible 

merger of the two deposit insurance funds. 

John D. Weier, Chicago Senior Regional Analyst 

For More Information 

• SAIF Assessments. FIL-88-96 

• Accounting for the SAIF Special Assessment and 

FICO Assessments. FIL-90-96 

• Federal Register 61, No. 201, pp. 53834-53841: 

Assessments. 

• Federal Register 61, No. 201, pp. 53867-53876: 

Proposed Rules - Assessments. 

• Press Release 79-1996 and 63-1996. 

• Chairman Helfer’s Speeches: July 19, 1996, and 

October 28, 1996. 

Regional Outlook 11 First Quarter 1997 

PROTOTYPE
 

 

 

 

 

 

Regular Features	 The Regional Economy
 

San Francisco Region Continues
 

to Record Rapid Growth
 

• 	 The San Francisco Region continues to set the pace in employment growth. The six fastest growing states in 

the nation are all located in the Region -- Nevada, Utah, Arizona, Oregon, Idaho, and Washington. As of 

November 1996 these six states each recorded employment growth rates of 4.0 percent or better over the last 

year. 

• 	 The resurgence of California, where the recovery has been picking up steam, is being helped by strong growth 

in the service sector. Services continue to lead the expansion in much of the Region. Strength in 

manufacturing and construction also are fueling growth. 

• 	 Although much of the Region has made significant progress in commercial real estate, it remains a problem in 

several markets. Furthermore, rapid growth in construction activity in several states is raising concerns 

about the sustainability of the boom, especially in light of a possible slowdown in population migration from 

California to other western states. 

• Finally, Hawaii is experiencing a prolonged recession, while two states that are relatively dependent on 

natural resources, Alaska and Wyoming, have fallen well behind the national expansion. 

Rapid Job Growth 

The Region’s economy continues to outperform the 

nation in creating jobs. Nevada and Utah are setting 

the pace for the Region. Despite some evidence in 

recent months of a moderation in growth rates for several states, employment in the Region still is growing 

much faster than the nation. Furthermore, most state 

level indicators and many forecasters in the Region 

point to a continuation of favorable conditions across 

most states in the Region, although many analysts 

expect growth rates to moderate in 1997. 

Services, which include an array of activities from 

business, professional and health services, to educaCHART 1
 

tion, entertainment and lodging, continue to pace the 

expansion in the Region. As the largest employment 

sector, services account for about 30 percent of all jobs 

in the Region. 

Manufacturing in the Region is being boosted by a 

strong turnaround in aircraft orders, strength in electronics and favorable export market conditions for 

many high-tech products. This sector, with a 13 percent share of employment, continues to boost growth in 

the Region, especially in the Pacific Northwest, and has 

been surprisingly strong in California. 

Much of the Region has made significant progress in 

the real estate area. However, commercial real estate 

Haw aii

A lask a

W yoming

M ontana

California

Oregon

W as hington

Idaho

A rizo n a

Utah

Nevada

United States

-2 -1 0 1 2 3 4 5 6 7 

Haw aii 

A lask a 

W yoming 

M ontana 

California 

Oregon 

W a s h in g to n 

Idaho 

A rizo n a 

Utah 

Nevada 

United States 

R eg io na l E m p lo ym en t G row th by State 

(Y ear-O ver-Y ear P e rc ent C h ange for N ov em be r 1996 ) 

S o u rc e : B u re a u o f L a b o r S ta t is tic s 

Regional Outlook	 12 First Quarter 1997 

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Regular Features The Regional Economy
 

CHART 2
 

Population and Employment Growth,
 

Selected San Francisco Region States, 1993-1995
 

16
 

14
 

12
 

10
 

Population 

NV UT AZ 

8
 

6
 

4
 

2
 

0
 

Employment ID OR MT WY WA CA 

Source: Bureau of Labor Statistics and Census Bureau 

continues to be an issue, especially in Southern California and Hawaii. Another concern for the Region is 

that the renewed prosperity of California could 

stem the population outflow to other states, an exodus that has stimulated much of the West in recent 

years. This could slow the boom in construction in 

fast growing states like Nevada and Utah. 

The Six Stars: Nevada, Utah, Arizona, Idaho, 

Washington and Oregon. 

These six states recorded employment growth rates two to three 

times faster than the nation over 

the twelve months ending in 

November 1996. Nevada and Utah, 

with total nonfarm payroll employment growth rates of 6.8 and 5.1 

percent, respectively were the fastest growing states 

in the nation, although both grew even faster in 1995. 

The other four rapidly growing states, Arizona, OreCHART 3A

gon, Idaho and, Washington all created at least 4 

percent more jobs over the last year, about twice the 

national rate of increase (see Chart 1 previous page). 

Among this group of fast growing states, three sectors 

stand out -- services, manufacturing and construction. 

Each of the states is reporting rapid growth in service 

jobs, at rates of close to 5 percent or better over the 

last year. All have experienced relatively strong 

manufacturing growth compared to the nation. Finally, 

with the exception of Washington, each of these states 

also has recorded rapid growth in the construction 

sector. As is noted in Region Outperforms Nation 

Despite Sight Decline in Profitability, reliance on 

the construction sector is of concern because banks in 

several states have increased their exposure to construction lending over the last year. This concern is 

especially true at smaller institutions, banks with 

assets under $1 billion, where exposure to construction lending is more than twice the national average 

in Arizona, Oregon and Washington, and more than 

four times the national average in Nevada. 

Nevada’s robust performance as the nation’s fastest 

growing state in part can be attributed 

to its rapid population growth. Chart 

2 focuses on the strong relationship 

during the 1993-1995 period between 

population growth and employment 

growth in selected western states. 

Population growth also has fueled the 

state’s booming construction industry, 

especially in the Las Vegas market. In 1996 construction of new air terminals in Las Vegas boosted commercial construction activity, while residential construction activity continued its steep climb. 

CHART 3B

Employment Composition for Nevada, 1996 

Construction Mining Govt 

9% 2% 12% Manufacturing 

5% 

Trans. 

5% 

Services Trade 42% 20% Fin, Ins & RE 

5% 

Source: Bureau of Labor Statistics 

Employment Composition for the San Francisco 

Region, 1996 

Construction Mining Govt 

5% 1% 17% Manufacturing 

Services 13% 

29% 

Trans. 

Fin, Ins & RE 5% 

6% Trade 

Source: Bureau of Labor Statistics 24% 

Regional Outlook 13 First Quarter 1997 

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Regular Features The Regional Economy
 

Several factors suggest caution with respect to the 

health of the Nevada economy. Slower growth in the 

service sector also is a cause for concern in Nevada 

because service jobs account for 42 percent of the 

state’s payroll employment, compared to 29 percent 

for the nation. Expansion in the service sector, which 

includes the state’s gaming industry, has slowed to 4.8 

percent over the last twelve months from over 10 

percent in 1994. Service jobs are now growing at the 

slowest rate in more than three years, mainly as a 

result of softness in the key hotel and amusement 

industry on which the state is heavily dependent. 

Nevada is heavily reliant on the building industry, as 

is shown in Charts 3a and 3b (previous page), which 

show a comparison of Nevada and the Region’s employment composition. Construction jobs accounted 

for almost 9 percent of employment in the state at the 

end of the third quarter of 1996, almost twice the 4.5 

percent share for the industry nationally and well 

above the Region’s 4.9 percent share. Since construction employment growth has slowed in recent months 

and the state is so heavily dependent on construction, 

the softening could have an impact on the overall state 

economy. Furthermore, there also has been a slight 

TABLE 1

rise over the last year in the office vacancy rate for 

Las Vegas. Still, as can be seen from Table 1, 

vacancies in Las Vegas remain below the national 

average. 

A construction slowdown in particular would have a 

significant impact on the health of Nevada’s noncredit-card banks and thrifts because of their relatively heavy concentration in commercial real estate 

lending. For example, banks with assets under $1 

billion, have more than four times as much exposure 

to construction lending as banks elsewhere in the 

nation. These factors suggest that conditions in the 

nation’s fastest growing state should be carefully monitored. 

Utah, the nation’s second fastest growing state, 

recorded strong job growth in all major 

sectors except governmental services 

over the last year. Transportation, 

finance and manufacturing all reported 

rapid growth. Strength in business 

services and telemarketing helped sustain favorable growth in the service 

sector. 

OFFICE VACANCY RATES SHRINKING IN MOST MARKETS

1991 1992 1993 1994 1995 1996

THROUGH 3Q

SALT LAKE CITY 19.1 19.8 14.6 8.6 6.6 5.8

PORTLAND 15.7 14.4 12.9 9.8 8.8 7.4

SAN FRANCISCO 13.7 12.6 12.4 10.1 9.2 6.8

SEATTLE 13.0 13.6 13.2 12.8 10.1 9.2

SACRAMENTO 13.7 15.8 16.8 13.4 11.8 9.9

LAS VEGAS 12.0 12.6 11.1 7.8 9.3 10.6

PHOENIX 26.0 24.0 20.1 16.6 13.0 10.6

TUCSON 23.3 22.8 20.5 16.0 11.8 11.0

ORANGE COUNTY 21.4 20.4 17.2 16.7 16.0 14.1

HONOLULU 4.4 7.3 10.2 12.3 13.6 14.9

SAN DIEGO 22.2 23.5 21.4 18.6 17.9 15.6

LOS ANGELES 19.1 19.7 19.9 20.1 19.3 19.2

UNITED STATES 19.0 19.0 17.7 16.1 14.6 13.2

NOTE: DATA COVER THE METROPOLITAN AREA AND ARE AVERAGE FOR THE PERIOD.

SOURCE: CB COMMERCIAL PROPERTY INFORMATION SYSTEMS

Regional Outlook 14 First Quarter 1997 

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Regular Features The Regional Economy
 

Like Nevada, Utah also is relatively heavily dependent on the construction sector, which in the past has 

tended to move closely with the state’s business cycle. 

Salt Lake area industrial vacancy rates have risen 

noticeably over the last year, although at 5.8 percent in 

the third quarter, they are still well below the 7.7 

percent rate for the nation. In the office market 

vacancy rates are less than half of the national average. Still, the sharp third quarter reduction in growth 

rates for both new awards for nonresidential construction and residential building permits should be monitored carefully in the months ahead. 

Arizona’s 4.7 percent job growth over the last twelve 

months also was broad based. Construction and 

services were the fastest growing 

sectors, both added new jobs at 

more than a 5 percent rate over the 

last year. The state also is showing strength in the manufacturing of 

aerospace equipment, electronics 

and machinery. 

There are some concerns that commercial real estate 

markets in Arizona are providing mixed signals. 

Some analysts have expressed concerns that the retail 

sector may be overbuilt. Industrial vacancy rates also 

have risen sharply over the last year and now exceed 

the nationwide average. Still, Arizona’s market for 

office space appears to be faring better than the nation, 

as vacancy rates remain below the national average. 

Expansion in the service sector played an important 

role in the strong performance of Oregon’s economy 

over the last year. Service jobs grew at a rate of 7.5 

percent in Oregon and accounted for the bulk of new 

jobs in the state. The Oregon 

economy has seen rapid increases in construction-related 

employment, too. Manufacturing employment also expanded 

at a moderate pace over the last 

year, while forest products stabilized after falling sharply in 1995. In contrast to the 

mixed signals in some other states, the construction 

industry in Oregon continues to expand rapidly. Commercial real estate is being boosted by the construction of several large high-tech manufacturing plants. 

Growth in employment in Idaho softened over 1996, 

especially in the last half of the year, and other signs 

of slowing are appearing as well. For example, recent 

announcements of layoffs in high tech manufacturing 

and a projected state budget shortfall are raising 

concerns about Idaho’s ability to maintain the expansion at the current pace next year. 

While recent increases in manufacturing were important in counteracting 

job losses in electronics and food 

processing, the increased volatility in 

Idaho’s growth rate, coupled with job 

losses in recent months in both services and construction, suggest that 

further slowing may be ahead for the state. 

Manufacturing is having its strongest impact in Washington. Boeing is building up a huge backlog of 

aircraft orders that has stimulated production and 

boosted employment over the last year. Meanwhile, 

the rapidly expanding service sector in Washington 

was paced by robust advances in business and computer services. The surge in 

demand for labor also appears 

to be putting pressure on the 

housing market in the Seattle 

area. 

While the other fast growing states in the Region are 

expected to slowdown somewhat in 1997, the Western Blue Chip Economic Forecast is predicting even 

faster growth in 1997 for the Washington economy, 

which ranked sixth in the nation in job growth in 1996. 

Key industries like aerospace and software are expected to continue to lead the state’s growth. 

California Is Back in Business 

The resurgence of the large California economy has 

boosted the overall pace of growth for the Region. 

The state accounts for more than 10 percent of national 

employment, and as of November, employment was 

growing at a significantly faster pace (2.6 percent 

over the last year) than the national economy (2.2 

percent). Those jobs helped drive 

the state’s unemployment rate down 

to 6.9 percent, a major improvement from the 8.0 percent unemployment rate one year earlier. 

The state’s service sector, with 

nearly 31 percent of California’s 

jobs, has been critical to the rebound. Service jobs increased 4 

percent over the last twelve months, and growth is 

expected to remain strong in 1997. Services added 

almost 153,000 jobs during the last twelve months, 

nearly half of the state increase. Tourism and entertainment continue to be a positive influence on service 

Regional Outlook 15 First Quarter 1997 

PROTOTYPE
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Regular Features The Regional Economy
 

sector employment. In addition, large increases were 

recorded in the trade, manufacturing and construction 

sectors. Finally, the recently proposed BoeingMcDonnell Douglas merger also may help to stabilize 

the Region’s important aerospace industry. 

The Bay Area, fueled in part by a strong performance in 

the Silicon Valley, which is experiencing an export 

boom, is outperforming much of the rest of the state. 

Growth in the Central Valley and Southern California 

continues to lag behind the recovery in other parts of the 

state. 

Southern California Continues to Lag 

In addition to weaker employment growth, Southern 

California continues to report soft housing and commercial real estate markets. On the residential side, much of 

the Los Angeles area still is reporting moderately lower 

housing prices and weak sales. The Real Estate Research Council reported in October that Southern California housing prices were down 1 percent from a year 

earlier. Over the same period, prices fell by closer to 2 

to 3 percent in the Riverside-San Bernadino and Los 

Angeles markets. On the commercial side, the key Los 

Angeles metropolitan area is reporting a very high 

office vacancy rate, 19.5 percent in the third quarter. 

Industrial vacancy rates for Southern California, at 11.3 

percent for the third quarter, also are well above the 7.7 

percent national average. 

Implications: Southern California continues to expand, but more slowly than most other Regions of the 

state. Although conditions clearly have improved in 

many areas, difficulties in this major metropolitan real 

estate market continue to put pressure on commercial 

real estate values, property owners and lenders. Despite the lingering problems the state’s outlook for 

continued growth looks sound. 

Lagging Well Behind the Region 

Montana, Wyoming, Alaska and Hawaii have lagged 

well behind the pace set by the rest of the Region. Of 

the four, Montana’s economy has fared the best, with 

employment growing a little faster than the rest of the 

nation, and the unemployment rate remaining well below 

the national average. Like its faster growing brethren, 

the state has benefited from strong growth in the service 

sector and improvement in communications and 

technology-based manufacturing. 

In contrast, employment growth in 

both Wyoming and Alaska stagnated over the last twelve months. 

Both states appear to have been hurt by their dependence on the natural resources sector, a factor that 

suggests they may not experience a rapid improvement 

in fortunes in 1997. Wyoming has suffered from 

continuing softness in agriculture, livestock, energy 

and the timber industry. In addition, the Alaskan 

fishing industry also has been hurt by low prices for 

the key salmon harvest. One positive note in Alaska 

has been a pick up in tourism, as both cruise ship 

traffic and the state’s visitor count improved in 1996. 

Tourism also is providing a stimulus to a Hawaiian 

economy that has remained mired in recession for four 

years. The state is experiencing both increased visitor 

counts and higher levels of spending by tourists. Despite the stimulus from tourism, over the last year 

employment fell by 1.6 percent, and Hawaii ranked 

next to last nationally in employment growth. Commercial office vacancy rates are very high, at 14.9 

percent for the first three quarters. In addition, both 

construction contracts and housing permits have fallen 

dramatically over the last year and they are showing 

no evidence of a turnaround. 

Implications: The ongoing economic downturn and 

deterioration in the Hawaiian real estate markets is 

causing the state’s financial institutions to record lackluster performances. Hawaii’s economic difficulties 

have driven up problem loan ratios and dampened the 

performance of the state’s banks and thrifts. 

Gary C. Zimmerman, Regional Economist 

Regional Outlook 16 First Quarter 1997 

PROTOTYPE
Regular Features	 Financial and Commodity Markets
 

Financial and Commodity Markets
 

• 	 The Treasury yield curve remains steeper than at the beginning of 1996, but it has flattened since July.

• 	 The San Francisco Region's bank stock index has outperformed the S&P 500 so far this year, but it has

underperformed the S&P Composite Bank Index.

• 	 Evidence suggests that changes in the slope of the short-end of the yield curve may be a good predictor of

bank stock performance relative to the broader market.

• 	 New yield curve spread futures and options offer an alternative to managing exposures to twists in the

yield curve.

• 	 Favorable forecasts and a drop in exports have driven grain prices lower.

Changes in Interest Rates and Bond Values CHART 1

As reflected in Chart 1, the yield curve has steepened and

then flattened this year. The 30-year Treasury yield

peaked on June 12 and July 5 at 7.19 percent -- 124 basis

points higher than at the beginning of 1996. It has since

fallen to 6.40 percent.

To demonstrate the impact that interest rate fluctuations

may have had on the market value of a bank's fixed

income portfolio, Table 1 presents three types of fixed

income securities common to a bank's portfolio: a Treasury bond, a FNMA mortgage pass-through, and a

callable FNMA Agency bond. The value of each bond

was computed on January 1, July 1, and November 25,

1996. Table 1 lists the percent change in the value of

each bond between those dates.

Together the bonds lost nearly 5.27 percent of their

value through July 1, 1996, but they recovered 2.74

percent by November. Through the eleven months ending in November, the value of the three-bond portfolio

was down 2.68 percent. On an aggregate basis, the San

TABLE 1

Francisco Region's banks fared better. The value of

securities holdings for all Call Report filers in the Region decreased by 0.92 percent for the nine months

ending in September. Obviously each institution's investment portfolio performance will vary depending on

the types of instruments held and the original acquisition

The Treasury Yield Curve in -996

5.0

5.5

6.0

6.5

7.0

3-mo 2-yr. 7-yr. 30-yr.

--/25/96

-/-/96

7/-/96

Source : Bloomb erg

Percent

.

EXAMPLE OF RECENT BOND PERFORMANCE

US TREASURY

30.YEAR BOND

$100,000 PAR

7.25% COUPON

7.75 YRS UNTIL MATURITY

FNMA

MORTGAGE PASS.THROUGH

$100,000 PAR

7.5% COUPON

7.59 YRS WAL

FNMA

CALLABLE AGENCY BOND

$100,000 PAR

7.55% COUPON

7.58 YRS UNTIL MATURITY TOTAL

DATE

11/25/96

7/1/96

1/1/96

SOURCE: Bloomberg

PRICE

$107,375

$103,406

$111,281

CHANGE FROM

PRIOR PERIOD

3.84%

(7.08%)

PRICE

$100,280

$98,130

$102,110

CHANGE FROM

PRIOR PERIOD

2.19%

(3.90%)

PRICE

$102,240

$100,100

$105,020

CHANGE FROM

PRIOR PERIOD

2.14%

(4.68%)

PRICE

$309,895

$301,636

$318,411

CHANGE FROM

PRIOR PERIOD

2.74%

(5.27%)

Regional Outlook	 17 First Quarter 1997

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Regular Features Financial and Commodity Markets
 

price of each instrument.

The San Francisco Region's Bank Stock

Performance

The stock market generally reacts

unfavorably to rising interest rates,

and reflecting this, the S&P 500

gained only slightly more than 3

percent through July (the latest peak

in long-term rates). Since July the decline in rates has

propelled the S&P 500 to new record levels, up 21

percent this year. The S&P Bank Index, however, has

performed well for most of the year, despite the

period of rising rates that occurred during the first two

quarters of 1996.

The stellar performance of the money center banks this

year -- with Citicorp and Chase Manhattan alone up

over 60 percent on the year -- caused the S&P Bank

Index to outperform indexes that track the performance

of the San Francisco Region's banks. The San Francisco Regional Bank Index (SFRBI), created by the

Division of Insurance (DOI), consists of the San Francisco Region's 23 members of the American Banker

Bank Index, which includes the 225 largest publiclytraded banks or bank holding companies. The SFRBI,

which is weighted by total market value of shares

outstanding, has gained 34 percent on the year, with

performance closely tracking the S&P Bank Index.

The SFRBIshares its three largest institutions with the

S&P Bank Index: BankAmerica Corp., US Bancorp,

and Wells Fargo & Company.

CHART 2
 

Do Yield Curve Spreads Provide a Peek at Future Bank Stock Performance?

Arecent study by Merrill Lynch suggests that the slope

of the short-end of the yield curve is a useful predictor

of near-term bank stock performance relative to the

broader market. For the period 1950 through 1995, the

median performance of bank stocks in the study's universe outperformed the broader S&P 500 index 76

percent of the time in the twelve months following a

widening of spreads between the 5-year and 3-month

Treasuries. In contrast, the median underperformed the

broader market 75 percent of the time in the twelve

months following compression in the 5-year and 3-

month spread. Chart 3 on the following page plots this

concept through 1995.

The results of this study are intuitive. A steepening

yield curve favors widening interest margins. The

opposite is true as the yield curve flattens.

Did the change in the 5-year/3-month spread over the

previous year portend the recent strength in bank

stocks? Not in this case. For the twelve months ending

October 1996, bank stock performance relative to the

broader market was strong despite a decline of nearly

200 basis points in the 5-year/3-month spread during the

preceding twelve months.

This recent departure from the historical pattern may

have resulted from the market's recognition of

widespread cost-cutting and "right-sizing" programs, as

well as merger and acquisition activity. Also, bank

stock performance has been buoyed by the use of excess

funds to repurchase outstanding shares at many institutions, which drives earnings per share higher.

A New Product for Managing Exposures to Yield

San Fransisco Region's Banks 0utperform the S&P 500 

but not the S&P Bank Index

--0%

0%

-0%

20%

30%

40%

50%

5-7an

26-7an

-6-Feb

0-:ar

29-:ar

-9-fpr

-0-:ay3--:ay

2--7un

-2-7ul

2-fug

23-fug-3-Sep

4-0ct

25-0ct

-5-zov

6-0ec

Change from -/0-/96

S&P Bank Index

S&P 500

San Fransisco Regional Bank Index

Sources: BloombergA merican Banker

Regional Outlook 18 First Quarter 1997

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Regular Features Financial and Commodity Markets
 

Curve Twists

Managing earnings exposures to changes in the yield

curve typically requires altering cash

market positions, executing customized

financial derivatives, or contracting

multiple positions in exchange-traded

derivatives instruments. Recently, the

Chicago Board of Trade (CBOT) introduced new

products that may eventually simplify managing this

risk -- Yield Curve Spread Futures and Futures

Options (YCSF).

YCSF contracts are structured so the payoff changes

only in response to changes in spreads between points

along the Treasury yield curve, rather than shifts in the

overall level of interest rates. These instruments may

provide advantages over hedges involving multiple

positions in interest rate derivatives that attempt to

isolate spreads along the yield curve. Ten futures

contracts with spreads that cover the 2-, 3-, 5-, 10-,

and 30-year maturity points were initially approved

for trading. Options on these contracts also are

traded.

In theory, YCSFs could be used to construct hedges

for specific interest-sensitive securities, or more

macro hedges based on an institution's overall balance sheetstructure. Regardless of how they are used,

a great degree of sophistication would likely be

needed to construct meaningful hedges. Insured institutions that execute YCSF contracts should be cognizant of the fundamental risks identified in the FDIC's

supervisory policy addressing financial derivatives.

Initial trading in the YCSFs has been thin and for some

contracts non-existent. A CBOT representative indicated that position holders have been fairly diversiCHART 3

fied with most volume being derived from speculators

and traders for proprietary accounts.

Favorable Forecasts, Fewer Exports Drive

Grain Prices Lower

Many market observers were surprised by a midNovember USDA report that projected near-record

corn and soybean crops this year. Favorable weather

during the late harvest pushed estimated corn production for the 1996/1997 crop year to

9.27 billion bushels -- the third best

harvest behind those of 1992 and 1994.

The USDA expects strong corn yields

over much of the Corn Belt and record

yields in Nebraska, Kansas, and Missouri. Likewise, soybean production is

forecast to total 2.4 billion bushels -- second only to

the 1994 harvest.

As expected, prices for corn continued to slide from

their summer highs, which were driven by fears of

supply shortages, late planting, and late harvest risks.

Weaker corn and soybean prices, the second largest

spring wheat harvest on record, and favorable weather

conditions for the recently planted winter wheat crop

also have softened wheat prices (see Chart 4 next

page). Further compounding price declines has been

a drop in demand from abroad as global competition

heightens. Domestic corn and wheat producers are

facing increased production, aggressive marketing,

and foreign export subsidies from competitors including Argentina and the European Union. Soybean exports appear more favorable as Pacific Rim

purchases of soybean meal to feed expanding livestock herds accelerate and as South American competitors face lower than expected production.

Twists in the Yield Curve Closely Correlate with

Subsequent-Year Relative Bank Stock Performance

-300

-200

--00

0

-00

200

300

-960-966-972-970-904-990

5-yearA 3-month Spread 

(bp)

0

40

00

-20

-60

Relative Bank Stock 

Performance

(-953=-00)

--- Yield Curve Spread

Sources: :errill LynchA Federal Reserve Board

-2-month Lagged Bank Stock Performance Relative to the S&P 500

Regional Outlook 19 First Quarter 1997

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Regular Features Financial and Commodity Markets
 

CHART 4 contract highs reached earlier in the year.
 

Prices R eceived by Farm ers

Septem ber -993 - 0 ctober -996

$0

$-

$2

$3

$4

$5

$6

$7

$0

9/-9933/-9949/-9943/-9959/-9953/-9969/-996

Per Bushel

W heat Corn

Soybeans

Source : USDA

Provided livestock and milk prices continue their recent

ascent or stabilize, declines in feed costs should improve profit margins for livestock and dairy farmers.

This is especially good news for cattle operators who

faced falling cattle prices and rising feed costs earlier in

1996. Table 2 shows the top agricultural commodities

for each state in the San Francisco Region.

The prospect for timely repayment of production loans

to the Region's agriculture banks appears good based on

the current expectations for operating income. Cash

flows for many wheat and cotton producers also should

be supported by the first of seven fixed-support payments under the 1996 Farm Bill.

According to the USDA, average prices for all three

crops for the current marketing year are expected to fall

from the average of the previous year, but should remain

favorable relative to the average price received over the

previous five marketing years. Futures markets generally agree with these predictions with some contracts

that mature over the 1996/1997 marketing year recently

trading approximately 30 percent below their respective

TABLE 2

 Allen Puwalski, Banking Analyst

 Steven E. Cunningham, Senior Financial Analyst

TOP AGRICULTURAL COMMODITIES IN THE SAN FRANCISCO REGION

BASED ON 1994 CASH RECEIPTS

AK AZ CA HI ID MT NV UT WA WY

CATTLE 5 1 4 1 1 1 1 1 1

DAIRY 2 3 1 5 3 3 2 3

HAY 3 4 2 3 3

GREENHOUSE & NURSERY 1 2 3 5 5

POTATOES 4 2 4 5

WHEAT 4 2 4

SUGAR BEETS 5 5 2

COTTON 2 5

BARLEY 3 5

SUGARCANE 1

PINEAPPLE 2

APPLES 2

GRAPES 3

LETTUCE 4

SHEEP AND LAMB 4

TURKEYS 4

LEMONS 5

MACADEMIA NUTS 4

SOURCE: USDA

Regional Outlook 20 First Quarter 1997

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Regular Features	 Regional Banking
 

Region Outperforms Nation Despite
 

Slight Decline in Profitability
 

• 	 Core earnings of most insured institutions remain solid; however, third-quarter operating performance at 

a number of savings institutions was negatively affected by the SAIF special assessment. 

• 	 There are signs of a pickup in lending for consumer credit, construction, and commercial real estate. 

• 	 Credit card delinquency and charge-off rates continue to increase and have begun to push up problem 

loan ratios. Bank earnings also were negatively affected by higher provisions to cover rising charge-offs 

Overall Conditions 

Although both balance sheets and examination ratings 

portray an improving industry, there are some areas of 

special interest this quarter. One area, recognition of 

the SAIF special assessment, was an isolated event and, 

though somewhat painful, is recognized as the answer to 

previously identified insurance fund problems (see 

SAIF Capitalized). Other areas, such as stubbornly 

rising consumer loan losses, particularly in credit cards, 

commercial real estate and construction lending trends, 

and lingering weaknesses in the Southern California 

economy, cause some concern about future asset quality. 

In addition, during the past six months, field examiners 

continued to express a higher level of concern regarding 

overall risks in lending practices by banks in the San 

Francisco Region as compared to banks elsewhere in 

the nation. 

Third-Quarter Losses Reflected at a Number of 

Institutions in the Region 

While most banks and thrifts reported solid earnings, 

operating performance for a number of the San Francisco Region’s insured savings institutions was dramatically affected by the recognition of the SAIF special 

assessment. This third quarter charge of $1.4 billion 

appears to be the primary factor in quarterly operating 

losses at 95 institutions. In contrast, only 39 also 

reported year-to-date losses. Both banks and thrifts 

were affected; however, the Region’s 120 thrifts absorbed $1.2 billion or 87 percent of the cost. As a 

result, Thrift Financial Report (TFR) filers actually 

posted an aggregate $413 million loss for the third 

quarter and recognized only $486 million in net income for the first three quarters of 1996, or an estimated 0.24 percent return on assets (ROA) based on 

TFR data. This compares to a $1.1 billion profit or 0.49 

percent ROA for the same period in 1995. Since the 

special assessment was a one-time charge, profitability 

for these institutions is expected to improve next quarter 

and will likely be further enhanced in 1997 due to lower 

assessment rates approved by the FDIC. 

Profits at banks in the San Francisco Region declined 

moderately in the third quarter as merger related overhead costs climbed 8 percent and provisions jumped 36 

percent to cover higher credit card losses. ROA 

dropped from 1.44 percent on September 30, 1995 to 

1.25 percent for September 30, 1996. Despite this 

downturn, the Region’s banks as a whole continue to 

outperform the nation, which averaged an ROA of 1.19 

percent. Only three states in the Region lag the national 

averages: Arizona at 1.02 percent, California at 1.07 

percent, and Hawaii at 1.00 percent. 

Over the last year banks in the San Francisco Region 

relied more heavily on two key sources of relatively 

more expensive purchased funds -- large time certificates of deposit and foreign borrowings -- a factor 

that likely keeps the pressure on net interest margins 

and earnings. These two sources accounted for the bulk 

of the Region’s banks’ $30.3 billion or 6.8 percent 

increase in deposits over the last four quarters. Banks 

added $8.6 billion in large CDs and $7.4 billion in 

foreign deposits, growth rates of 24.1 and 15.4 percent, 

respectively. 

Net changes in the key sources of traditional retail 

deposits, NOWs, Savings/MMDAs and smalldenomination time certificates, were modest over the 

last year, an increase of $2.5 billion or 1.0 percent. 

However, within this category there were some dramatic shifts, although they likely arose as banks took 

actions designed to reduce their need to hold reserves 

against deposits at the Federal Reserve. 

In this Region a number of large institutions have 

instituted deposit sweep programs that shift funds 

Regional Outlook	 21 First Quarter 1997 

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Regular Features	 Regional Banking
 

from transaction accounts on which banks must hold 

noninterest-bearing reserves at the Federal Reserve 

into accounts which require no reserves. These 

programs typically sweep balances out of NOW or 

demand accounts that have a 10 percent reserve requirement, and into nontransactions accounts, primarily savings accounts, with no reserve requirement. In 

this Region, banks reported a $9.0 billion decline in 

NOWs over the last year, which would reduce 

noninterest-bearing reserves by $900 million. It is 

likely much of the reduction in NOWs in this Region, 

and nationally, was driven by reserve-avoidance 

sweeps. 

Regional Credit Card Lending 

The San Francisco Region’s banks (excluding TFR 

filers) increased credit card lending by $11.8 billion 

during the past 12 months, a 

31 percent growth rate. 

However, the relocation of 

American Express Centurion Bank from Delaware 

to Utah with its $8.9 billion 

credit card portfolio accounts for the majority of the 

increase. The growth rate adjusted for this one institution actually drops to a more reasonable level of 8 

percent. Total credit card loans held by the Region’s 

banks now approximate $49 billion, with about $250 

billion in credit lines available. 

Although credit cards account for only 11 percent of 

total loans in the Region, credit card charges-offs 

represent 68 percent of the Region’s total chargeoffs this quarter, up from 52 percent for the year 

ended December 31, 1995. On an aggregate basis, the 

Region’s banks registered a high 4.6 percent 

(annualized) third quarter charge-off rate for such 

credits, which is up from 3.4 percent for the year 

ended December 31, 1995 (see Chart 1). Improvement in this trend may not occur in the short-term, as 

banks in the Region still report past due levels approaching 4.3 percent in this category. 

Given the negative performance trends of the Region’s 

consumer loan portfolios and all the recent publicity 

over consumer debt levels (see Consumers Declare 

Bankruptcy in Record Numbers), the growth in 

credit card exposure warrants continued close attention by regulators and bank management. In that 

regard, the OCC issued additional guidance to banks 

during the third quarter, focusing on maintaining prudent underwriting standards and controls. In addition, 

CHART 1
 

Credit Card Net Charge-offs 

San Francisco Region and U.S. 

5.0% 

4.5% 

4.0% 

3.5% 

3.0% 

2.5% 

Source: Bank Call Reports, 9-30-96 

Region 

U.S. 

93 94 95 96 

recent surveys have noted that some institutions are 

raising cutoff scores on their credit scoring models. 

Increased attention may be especially important in 

Arizona, Nevada, and Utah banks, where much of the 

San Francisco Region’s credit card activity is centered. Banks in these states hold over 82 percent of 

credit card outstandings in the Region. The great bulk 

of this activity is conducted by affiliates of larger 

banking and financial services companies. However, 

exposures are not limited to just one area or larger 

institutions, as over 600 of the banks in the Region 

have at least minimal exposure to credit card debt. 

Fifteen nonmember banks have exposures exceeding 

50 percent of Tier 1 capital. 

Loan Survey Information 

The San Francisco Region’s FDIC examiners continue 

to register concern over commercial real estate loan 

portfolios and competitive pressures. Surveys conducted by the FDIC Division of Research and Statistics on 130 banks examined in the San Francisco 

Region during the last six months show: 

• 	 Risks associated with commercial real estate 

loan portfolios were considered “above average” in all four survey categories more frequently than the institutions surveyed nationally. This trend is most evident in the states of 

Alaska, California, Nevada, and Utah. 

• 	 Minimum amortization and large balloon payments were common in 30 percent of the 88 

commercial real estate loan portfolios of the 

surveyed banks in the $25-$300 million size category. This condition compares to 23 percent for 

Regional Outlook	 22 First Quarter 1997 

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Regular Features	 Regional Banking
 

all banks surveyed on a region wide basis and 10 percent nationally. 

• 	 Funding speculative construction projects was also 

common in 19 percent of the banks surveyed in 

the $25-$300 million category. Nationwide, this 

ratio stands at 9 percent for all banks surveyed 

and 16 percent for the Region as a whole. 

• 	 Competitive lending pressures were considered 

“above average” at about 29 percent of examinations in the Region versus 18 percent on a national basis. 

• 	 Higher than normal risk characteristics were 

found in all three survey categories for the 11 

banks surveyed in the Region with total assets 

less than $25 million which are active in making 

business loans. 

• 	 Monitoring of collateral positions was considered inadequate in 60 percent of these eleven 

banks. This compares to 11.2 percent nationwide 

and 16.0 percent for the region. 

Construction and Commercial Real Estate 

Lending On the Upswing 

Banks in five states -- Utah, Nevada, Arizona, Montana, and Alaska -- all significantly increased their 

construction portfolios. Utah led the Region by adding 

$298 million or 42 percent to their construction portfolio. However, Nevada’s 37 percent increase may 

be more noteworthy due to concerns about the 

state’s heavy reliance on the construction sector 

(see San Francisco Region Continues to Record 

Rapid Growth). As can be seen from Chart 2, conCHART �

struction loans account for over 

19 percent of all loans in Nevada 

banks with under $1 billion in 

assets, compared to just over 4 

percent for similarly-sized banks 

nationally. 

Commercial real estate lending activity also was 

strong in several states during the third quarter. California is finally heating up after several years of 

negative or nominal growth, despite some lingering 

asset quality problems, especially in Southern California. The state’s 15 percent growth rate for the 

third quarter was at a level not reached since 1991. 

Utah, Montana, Arizona, Alaska, and Washington 

banks also were active in the commercial real estate 

lending area with annual growth rates of over 10 

percent. 

Soft economic conditions in both Alaska and Hawaii 

contributed to increased commercial real estate delinquency rates during the third quarter. Delinquency in 

these states now stands at 3.43 percent and 3.27 

percent respectively, well above the national average 

of 1.73 percent. 

Catherine I. Phillips-Olsen, Senior Regional Analyst 

Maj-Brit Melugin, Division of Resolutions 

and Receiverships 

0 

5 

10 

15 

20 

Nation Region NV OR WA UT AZ CA ID AK HI WY MT 

Construction Loan Exposure as a Percent of Total Loans 

By State and Bank Size as of September 30, 1996 

Banks with under $1 Billion in Assets 

Banks with over $1 Billion in Assets 

Source: Bank Call Reports, 9-30-96 

Regional Outlook	 23 First Quarter 1997 

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