California banks ended the first half of the year safer and more profitable than their counterparts in most of the western United States, although they still lag behind the national average, according to the latest data from the Federal Reserve Bank in San Francisco.
Throughout California, loan growth is picking up, loan quality is improving and problem loans are being "worked down to manageable levels," said a Fed report released last month.
Data from the Federal Deposit Insurance Corp. show that in general, banks based in San Diego County are outperforming their statewide peers.
"Overall, financial conditions continue to improve," the Fed report said.
"While bank earnings in the [Western states] remain relatively weak, improving earnings trends continue, and an increasing number of [Western] banks are again posting satisfactory earnings."
On the other hand, the Fed warned that banks are being hurt by shrinking interest rate margins, which could continue for a while, especially as the Fed continues to keep short-term interest rates at near zero to stimulate the economy.
"It’s critical that short-term interest rates remain low for a significant period of time…" John Williams, president of the Fed's San Francisco branch, told an audience in San Diego this month. "The effects of lower interest rates take place over the course of many months and even years."
Following are some of the highlights of the report:
*Liquidity. After five years of building cash reserves to historic heights, during a "flight to safety" after the 2008 financial freeze, short-term investments at banks throughout the Western region -- which stretches from the Rocky Mountains to Hawaii and Alaska -- declined in the second quarter. At the same time, the ratio between loans and assets rose for the first time since 2007.
For banks based in San Diego County, the average ratio of core capital to assets dipped from 12.16 percent in the first half of 2012 to 11.80 percent in the first half of 2013, according to the FDIC.
“Although liquidity and capital levels remain at historic highs, the move signals an end to the post-recession buildup of cash," the Fed report read.
*Profitability. Return on assets from Western regional banks hit its highest point in five years during the second quarter, but at many banks the return remains anemic and the growth rate is painfully slow. In California, banks generated an average of 0.77 percent return on assets -- the third-highest rate in the west after Alaska and Hawaii, but still behind the national average of 0.88 percent.
In San Diego County, banks averaged a 0.83 percent profitability rate, based on FDIC data, but that's down sharply from the 1.74 percent return during the same period of last year. Local bankers blame the slowdown on a variety of factors, ranging from shifting interest rates to the costs of cleaning up their loan portfolios.
Among banks headquartered in the county, Balboa Thrift and Loan generated the highest return at 2.06 percent, followed by Home Bank of California, 1.87 percent; Bank of the Internet, 1.54 percent; Torrey Pines Bank, 1.20 percent; and California Bank & Trust, 1.15 percent, according to the FDIC.
*Loan quality. On average, only 1.7 percent of the assets in California banks during the second quarter were non-performing, meaning unpaid or long overdue. That's the third-lowest rate in the nine Western states, after Hawaii and Alaska.
In comparison, the loan quality in banks in Arizona and Nevada -- which were particularly hard hit by the real estate implosion in 2007 -- continues to rank among the worst in the nation.
In banks headquartered in San Diego County, an average of 0.93 percent of assets consist of bad loans or foreclosed properties, compared to 1.73 percent in the first half of 2012. Vibra Bank in Chula Vista listed zero bad loans in its latest report to the FDIC. Other banks with low ratios of problem loans include Rancho Santa Fe Thrift & Loan, 0.13 percent; Seacoast Commerce Bank, 0.16 percent; and Torrey Pines Bank, 0.33 percent.
*Interest rates. The Fed report said that bank growth throughout California has been hampered by a squeeze in interest rates, narrowing the amount of interest that banks pay on deposits versus the amount they collect on loans.
In San Diego County, for instance, the average interest rate margin among locally based banks shrank from 5.13 percent in the first half of 2012 to 4.78 percent in the first half of 2013.
The shrinkage in the margin has led some banks to move their money into higher-yielding assets while cutting down on their relatively high-cost time deposit accounts.