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Western Banks Outperform Others in U.S.


WASHINGTON — The nation's banking system slid further downhill during the second quarter, but Western states, bucking the broader trend, enjoyed relatively stable profits and a declining number of delinquent real estate loans, federal officials reported Thursday.

Commercial banks nationwide suffered a steep 24% profit decline during April, May and June as they set aside large sums to cover expected losses on real estate and loans to developing countries, according to a new study by the Federal Deposit Insurance Corp.

The deepening recession in New England, accompanied by growing delinquencies in real estate lending in the region, was responsible for much of the $2 billion put in reserve for future losses for banks nationwide.

In sharp contrast, "California continues to show good results--at this time, the West is clearly looking strong," FDIC Chairman L. William Seidman said at a news conference.

The Western region, dominated by California, reported increased profits for the quarter. California banks substantially increased real estate lending, but it was primarily residential mortgages, the "safest kind of lending," Seidman said.

The nationwide results are "clearly a mixed bag," he said. The kind of real estate woes afflicting New England are now being duplicated in less severe fashion in the middle Atlantic states and the Southeast, according to the FDIC. The number of delinquent loans--those overdue 90 days or more--is growing steadily throughout the East, the agency said.

The nation's 12,500 commercial banks recorded profits of $5.3 billion during the second quarter, down from $7 billion earned in the same period a year ago.

Profits plunged 63% in the Northeast region. "The credit quality problems of banks in the Northeast were not limited to real estate assets," the FDIC said in a quarterly bank profile issued Thursday. "Commercial credits, loans to developing countries and consumer loans all showed weakness, reflecting the increasing difficulties facing many large regional and money-center institutions."

The real estate slump in New England has spread to Eastern and Southeastern states, dragging down bank earnings. Profits also fell in the central region of the country, the agency reported.

By contrast, profits rose 4% in the West, climbing to $1.27 billion from $1.22 billion a year earlier. The region includes California, Arizona, Nevada, Utah, Colorado, Wyoming, Montana, Idaho, Oregon, Washington, Alaska and Hawaii.

California generated most of the earnings, with second-quarter profits of $906 million, down 7% from $977 million in the year-ago period.

Across the country, the banking system has continued to shift significantly into real estate lending, the FDIC said. "This is not an adverse factor if done on a sound basis," Seidman said. "Clearly banks are picking up some of the business S&Ls used to do."

Overall, banks increased their real estate lending by 11%, while in California the increase was a hefty 30%. Home mortgages increased more than $5 billion, an 11% rise, while home equity loans rose $1.1 billion, or 13%, in the quarter.

"California indicators are showing very favorably," said Ross Waldrop, financial analyst in the FDIC's research division. "The growth in assets is well above the national average. Banks are making more loans, and we have yet to see signs of problems surfacing."

Only 1.44% of real estate loans in California were listed as noncurrent on payments, compared to a national figure of 3.45%.

Significantly, the delinquent share of real estate loans held by California banks fell by about 1%, while the bad portfolio nationally rose 14.2%.

Nevertheless, federal officials see potential weaknesses for California in the high vacancy rates reported in some areas for office and commercial buildings. "We are watching it carefully," Seidman said. "The ability to absorb (the empty floor space) depends on the strength of the economy."

California's bullish statistics were tempered by a warning that the state may not be immune from the problems affecting other regions.

"Experience in the Southwest and New England shows that problems can continue to appear long after the growth stops," the FDIC report said. "Consequently, we are not abandoning our concerns about the impact of slower markets on the health of the Western banks."

The Persian Gulf crisis should help the oil-producing states in the Southwest, where increased revenues from higher petroleum prices will boost local economies, generating new bank loans and helping depressed real estate prices, according to FDIC officials.

New England, already staggering under the biggest concentrations of problem loans, will be hurt even more by higher costs for heating oil and other fuels during the coming winter season, the report warned.


Real estate Real estate loans as share of total assets on June 30: United States: 24% California: 35%

Percentage of real estate loans overdue 90 days or more: United States: 3.45% California: 1.44%

Source: Federal Deposit Insurance Corp.

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