FEDERAL DEPOSIT INSURANCE CORPORATION FIRST QUARTER 1997
 

FDIC DALLAS
 

REGION
 

DIVISION OF

INSURANCE

ALAN C. BUSH,
 

SENIOR REGIONAL
 

ANALYST
 

ADRIAN R. SANCHEZ,
 

REGIONAL
 

ECONOMIST
 

In Focus This Quaitei
 

• Consumers Declare Bankruptcy in Record Numbers - Despite 

favorable economic conditions, the number of consumers declaring bankruptcy is on 

the rise in the Dallas 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 

· Economic Diversification · Interest Rates · Overall Conditions 

· Job Growth · Bond Values · Commercial Real Estate 

· Personal Income · Bank Stocks · Ag Banks

· Single-family Housing · New Products 

· Multifamily Housing · Grains and Soybeans

· Commercial Real Estate

 See page 12 See page 16 See page 20 

A Publication of the Division of Insurance For Internal Use Only 

PROTOTYPE
 

Dear Reader, 

The prototype edition of the Regional Outlook for the Dallas 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 Alan 

Bush at (214) 220-3434 or email him at Alan C. Bush@DOI@Dallas. 

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 Dallas Region. 

• 	 Oklahoma stands out among the states in the 

Dallas Region with the seventh highest per 

capita bankruptcy rate in the country. 

• 	 Credit card charge-offs are approaching recession levels. 

Despite favorable economic conditions, the number of 

consumers declaring bankruptcy is on the rise throughout 

much of the Dallas 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 Dallas Region? 

Chart 1 shows the rising trend in consumer loan losses 

in the Dallas Region as well as the close relationship 

between these losses and personal bankruptcy filings. 

CHART 1

Table 1 (next page) shows that personal bankruptcy 

rates are rising in all states throughout the Region. 

Current levels are fairly moderate, compared to other 

states in the country, with the exception of Oklahoma 

which has the seventh highest per capita filing rate in the 

nation. Second quarter rates grew dramatically in Oklahoma despite its low unemployment rate and a relatively 

high percentage of disposable income to debt. 

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. 

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 

CHART 2

Personal Bankrupcties Correlate with 

Consumer Loan Charge-Offs in the Region 

Filings 

(000s) 

2.0% 25 

20 1.5% 

15 

1.0% 10 

0.5% Gross Charge-off Rates 5 

0.0% 0 

91 92 93 94 95 96 

Sources: Administratie 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 

PROTOTYPE
 

 

 

 

 

In Focus This Quarter
 

consumers’ appetite for credit. Consumers and their 

lenders are now experiencing the after-effects of this 

credit expansion. 

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, 

many of which are interrelated. 

A recent study by SMR Research Corporation 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. Among the factors identified by the 

report as important are: 

• 	 inadequate health insurance; 

• 	 inadequate auto insurance; 

• 	 a large percentage of self-employed workers; 

• 	 garnishment of wages; 

TABLE 1

• 	 high divorce rates; 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. In Oklahoma, for 

example, SMR attributes a high volume of bankruptcy 

filings to a high divorce rate, a very high percentage of 

the population with no health insurance, and a low level 

of auto insurance coverage. 

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 

These trends have raised concerns about the outlook for 

credit card lenders. As shown in Chart 3 (next page), 

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 

BANKRUPTCY RATES PER THOUSAND PERSONS

COLORADO

NEW MEXICO

OKLAHOMA

TEXAS

DALLAS REGION

UNITED STATES

1990 1991 1992 1993 1994 1995 3RD QTR

1996

ANNUAL.

3 Q 1996

STATE

RANKING

4.87 4.88 4.31 3.58 3.33

2.75 2.66 2.57 2.14 1.95

5.01 4.52 4.20 3.84 3.71

2.52 2.48 2.58 2.23 2.08

3.16 3.02 3.17 2.94 2.79

3.12 3.46 3.52 3.15 3.00

3.49

2.38

3.99

2.40

2.93

3.33

4.06

3.11

5.07

2.98

3.38

4.15

22

32

7

34

NA

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
 

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 

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 underCHART 3

U.S.Credit Card Charge-Offs Are
 

Approaching Levels Not Seen 

Since the Last Recession
 

5.0
 

4.5
 

4.0
 

3.5
 

3.0
 

2.5
 

Source: Federal Reserve Board 

Recession 

writing standards of each institution. Given the trends 

outlined above, credit card lending practices appear 

worthy of continued close attention by bankers and 

regulatory agencies. 868788

8990919293949596 

Diane Ellis, Senior Financial Analyst
 

Alan C. Bush, Senior Regional Analyst
 

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. 

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 

TABLE 1

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. 

Industry observers Reserve accounting for have suggested that bad debts for tax pur- over 1,000 banks poses is an issue affecting nationwide will 

only smaller institutions. make the Currently, reserve ac- subchapter “S” counting is allowed only election. 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 

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 

NUMBER OF BANKS WITH UNDER $100 MILLION IN TOTAL ASSETS

NATIONAL NON•MEMBER STATE

MEMBER

TOTAL

COLORADO

NEW MEXICO

OKLAHOMA

TEXAS

65 69

13 20

85 164

301 322

26

3

20

33

160

36

269

661

TOTAL 464 575 82 1,126

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

Regional Outlook	 6 First Quarter 1997 

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In Focus This Quarter
 

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. 

Number of Eligible Institutions 

While figures on the number of eligible institutions is 

not available, the numbers of small banks in the Region 

may provide insight into where the tax election may be 

seen. As Tables 1 (previous page) and 2 show, there 

are more than 1,100 commercial banks in the Dallas 

Region with under $100 million in assets and over 700 

with under $50 million in assets. It is expected that a 

large percentage of these companies would meet the 

eligibility requirements. Texas has the most banks in the 

Region that are potential candidates for subchapter S 

conversion. This is because Texas has several small 

banks from its days as a unit banking state. 

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 would generTABLE 2

ally 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 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 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 the companies work to meet shareholder number 

requirements or attempt to get the required 100 percent 

shareholder approval. 

NUMBER OF BANKS WITH UNDER $50 MILLION IN TOTAL ASSETS

NATIONAL NON•MEMBER STATE

MEMBER

TOTAL

COLORADO

NEW MEXICO

OKLAHOMA

TEXAS

37 54

5 8

47 122

175 205

19

3

13

23

110

16

182

405

TOTAL 264 389 58 713

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

Regional Outlook 7 First Quarter 1997 

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In Focus This Quarter
 

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 in 

situations where growth is strong or delinquent assets 

are rising. 

Other Drawbacks 

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

the institution will need to meet all the eligibility 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 financial 

institutions. Specific guidelines from the IRS are expected by year-end 1996 which may affect an institution’s decision to elect subchapter “S” status. 

The states of Connecticut, Michigan, New Hampshire, 

New Jersey, Tennessee as well as the District of 

Columbia do not recognize the federal subchapter “S” 

election. Therefore, these jurisdictions do not allow the 

pass-through benefits of the “S” corporation for the 

applicable state or district taxes. 

Subchapter “S” institutions remain under the same capital adequacy standards and dividend restrictions as 

other institutions. However, there are times when it may 

be difficult to maintain the subchapter “S” 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 new eligible shareholders may be difficult 

because the total number of eligible shareholders must 

remain 75 or fewer to preserve the “S” status. Furthermore, no 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 

restrictions for subchapter “S” corporations as for regular corporations. However, There may be a rise in 

one possible new twist various “phantom 

bank mergers” or is that, in some cases, 

the tax liability payment change in control 

for shareholders may be applications as the 

due before distributions companies work to 

are funded from the in- meet shareholder 

stitution. However, this number requirements 

is considered similar to or attempt to get the 

pressures brought by required 100 percent 

shareholders in other shareholder approval. 

corporations when they 

require dividend payments to fund debt payments on stock loans. 

New Value for the Community Bank Charter 

Overall, this newly legislated tax break for closelyheld financial institutions may invigorate the value of 

the community bank or thrift. However, it also adds a 

new “wrinkle” in the complexity of the examiner’s 

job. While consolidation trends can be expected to 

continue at larger companies, the new tax benefits 

available for closely-held institutions add a new incentive for the survival of community banks and 

thrifts. 

Ronald L. Spieker, Chief, 

Depository Institutions Analysis Section * 

For More Information 

Subchapter S Election for Federal Income Taxes. 

FIL-91-96. 

* Extensive review and comments were provided by Robert F. 

Storch, Chief, Accounting Section of the Division of Supervision. 

Regional 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. Almost 600 banks and 

thrifts in the Dallas Region paid $379 million 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: 

• 	 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. 

TABLE 1

• 	 Over 45 percent of SAIF assessments were being 

diverted from the SAIF to pay off FICO obligations arising from the thrift failures of the 1980s. 

• 	 The SAIF assessment 

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 

transfer SAIFassessable deposits 

Over 45 percent of 

the Dallas Region’s 

institutions that 

paid the special 

assessment posted a 

quarterly net 

operating loss for 

the third quarter of 

1996 ... 

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: 

DALLAS REGION INSTITUTIONS AFFECTED BY SAIF SPECIAL ASSESSMENT

# OF INSTITUTIONS

AFFECTED AND TOTAL

ASSESSMENT BY TYPE

MUTUAL SAVINGS S&L STATE NATIONAL

BANKS MEMBER

NON•

MEMBER

TOTAL

COLORADO

NEW MEXICO

OKLAHOMA

TEXAS

0 4 11 1 6

0 5 5 0 2

0 7 4 0 12

12 21 19 0 17

3

1

14

11

25

13

37

80

TOTAL 12 37 39 1 37 29 155

ASSESSMENT

($000S)

24,161 230,681 25,551 5,809 77,674 15,218 379,094

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
 

• 	 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 ten 

exempted institutions in the Dallas Region. This 

number of exempted institutions is small compared with 

the estimated 140-150 institutions in the Region that 

paid about $379 million 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, 

TABLE 2

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 

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 schedRegional Outlook 10 First Quarter 1997 

ule 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 

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 45 

percent of the Dallas Region’s institutions that paid the 

special assessment posted a quarterly net operating loss 

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

PROTOTYPE
 
 

 

 

 

 

 

 

 

 

 

 

In Focus This Quarter
 

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
 

Dallas Region Outpaces the Nation Again
 

• 	 The Region’s economy continues to make strides toward diversifying into transportation, wholesaling, and 

advanced technology manufacturing. 

• 	 The payroll employment growth rate in the Dallas Region remains among the highest in the nation. 

• 	 Job creation has tapered off slightly in recent months, particularly in Colorado and New Mexico -- two 

previously fast growing states. 

Economic Diversification Well Under Way 

The Dallas Region is becoming a more servicesoriented economy as it continues to reduce its traditional 

dependence on oil and gas. Over a ten-year span 

(1985-1995), services saw its share of the Region’s 

nonfarm employment increase from 20 percent to 27 

percent and its share of earnings jump from 27 percent 

to 35 percent. “Services” include such diverse categories as business, health, legal, educational, engineering and management services. The Region’s oil and gas 

extraction industry, by contrast, has seen its share of 

total earnings fall from 8.6 percent in 1985 to 5.1 

percent in 1995. Similarly, the Region’s national defense has seen its share of earnings fall during the past 

ten years -- from 2.8 percent in 1985 to 2.2 percent in 

1995. 

Increasingly, businesses within the Region are focusing 

on export markets as a source of new demand for their 

products. The Southwest also has become a favorite of 

many high-tech firms seeking to take advantage of the 

Region’s central location, plentiful supply of land, low 

labor costs and favorable tax structure. Rapid growth in 

high-tech and trade has given rise to many professional 

and business service jobs. Many of these are highskilled, high-paying jobs. The Region is realizing several benefits from this diversification. Perhaps most 

importantly, these new activities have been an engine 

for growth that should lessen the exposure to risk that 

existed when the Region was more heavily dependent 

on a few concentrated business activities. 

Job Growth Moderates in 1996 

Nonfarm employment in the Dallas Region grew 3.1 

percent versus 2.0 percent for the nation through 

November 1996. Driven by continuing economic diversification, nonfarm employment growth in the Region has exceeded U.S. nonfarm job growth every year 

this decade (see Chart 1). Leading the Region in 

nonfarm job growth in 1996 is New Mexico (3.8 percent), followed by Colorado (3.2 percent), Texas (3.0 

percent) and Oklahoma (2.7 percent). 

Job growth in Colorado, however, has slowed considerably since the first half of 1996. Based on seasonally 

CHART 1	 CHART 2
 

Dallas Region Job Growth Outpaces 

the U.S. in the 90s 

Percent 

Change U.S. 

4 Dallas 

3 

2 

1 

0 

-1 

-2 

90 91 92 93 94 95 96 

Source: Bureau of Labor Statistics 

0 

2 

4 

6 

8 

10 

90 91 92 93 94 95 96e 90 91 92 93 94 95 96e 

Regional Income Growth Surpasses U.S. 

U.S Dallas 

Source: Bureau of Labor Statistics 

Percent Change 

Regional Outlook	 12 First Quarter 1997 

PROTOTYPE
 

 

 

 

 

 

 

 

 

 

 

 

Regular Features The Regional Economy
 

adjusted payroll data, Colorado employment grew 4.3 

percent in the first half of 1996 but decelerated 

sharply during the second half. Employment data for 

the period July through November 1996 reveal a 

year-over-year growth rate of only 2 percent. 

Some analysts expect job growth in 1997 to be the 

Region’s slowest since 1992, when payroll employment advanced 1.6 percent. Data Resources Inc. and 

Regional Financial Associates are predicting that the 

Region’s job growth will be between 2.0 percent and 

2.5 percent in 1997. A slowdown in the Region could 

adversely affect the performance of insured institutions whose lending decisions are based on the 

assumption of continued rapid growth in the Region’s economy. 

More Jobs Mean Greater Income and 

Spending 

Households in the Region continued to increase their purchasing 

power because of strong employment growth and low inflation. 

Personal income growth in the 

Dallas Region advanced at a 

rate of 6.1 percent in the first three quarters of 1996, 

compared to 5.5 percent for the U.S. (see Chart 2 

previous page). 

Consumer prices rose more slowly in the Dallas 

Region than in the U.S. as a whole, further boosting 

purchasing power. The consumer price index for all 

urban consumers in the Dallas-Ft. Worth and Houston 

metropolitan areas recorded increases of 2.7 percent 

and 2.1 percent, respectively, for all of 1996, comCHART 3

pared to a 2.9 percent increase for the U.S. Anecdotally, 

several national chain retailers (e.g., JCPenney and Dayton Hudson) reported having better retail sales gains in 

their Southwest stores than anywhere else in the country. 

Single-family Housing Construction Continues 

to show Strength... 

Single-family housing permits in the Region increased 

12.9 percent in 1996, far outpacing the U.S. average of 

7.4 percent. Stoking the demand for housing construction has been strong job growth, robust demand for 

single-family homes, greater income and a surge of 

migration into the Region. FDIC-insured institutions in 

this Region are benefiting from the strong residential real 

estate market as they provide funding to meet the credit 

needs of both builders and homebuyers. 

...but Multifamily Housing Construction is Leveling Off 

Multifamily housing permits in the Region increased 

only 4 percent during 1996, to a level of approximately 

50,100. This represents a cooling of the rapid growth 

experienced during the previous three years, when the 

level of multifamily permits almost quadrupled from 

about 12,500 in 1992, to 48,200 in 1995. 

The 139,000 multifamily construction permits issued 

during the period 1994-1996 was the best showing in the 

Dallas Region since the passage of the Tax Reform Act 

of 1986, which sharply reduced the tax advantages of 

real estate investments. 

CHART 4

-20 

-10 

0 

10 

20 

30 

40 

90 91 92 93 94 95 96 

Single Family Housing Activity 

in the Dallas Region 

(Yearly Change in Permits) 

U.S Dallas 

Source: U.S. Census Bureau 

90 91 92 93 94 95 96e

0 

100 

200 

300 

400 

500 

90 91 92 93 94 95 96e 

Source: National Association of Realtors 

Existing Single Family Home Sales in the 

Dallas Region (000s) 

Regional Outlook 13 First Quarter 1997 

PROTOTYPE
 

 

 

 

 

 

 

 

 

 

 

 

 

 

Regular Features The Regional Economy
 

Existing Single-family Home Sales surge to 

record levels 

The Dallas Region is on pace to finish 1996 with its 

highest total of existing single-family home sales since 

the National Association of Realtors began keeping 

records in 1980. Based on data for the first three 

quarters of 1996, the volume of home sales in the 

Region is showing a 10.7 percent increase over the 

same period in 1995. If sustained for the entire year, 

approximately 465,000 homes will have been sold 

last year (see Chart 4 previous page). 

Overbuilding in Residential Housing? 

Concerns have been raised about 

whether the Region may be heading toward another period of 

overbuilding as in the early 

1980s, that subsequently led to a 

sharp fall-off in homebuilding 

activity in the latter half of that decade. For example, 

during the period 1980-1986, the Region averaged 

235,000 residential building permits annually. Over 

the next five years (1987-1991), the bottom fell out of 

the homebuilding market, with residential building 

permits averaging only 72,300 per year, a decline of 

over two-thirds from the previous period. 

The downturn in residential construction during the 

late 1980s was prompted by a number of factors, 

including a collapse in oil prices that contributed to a 

recession in the Region. Beginning in 1983, annual 

TABLE 1
 

nonfarm employment fell during three of the next five 

years and led to an out-migration of residents looking 

for work. Moreover, the savings and loan crisis disproportionately affected the Region, leading to a tightening 

of credit and an exacerbation of already weak economic 

conditions in the Region. Finally, the Tax Reform Act 

of 1986 removed generous tax incentives on apartment 

buildings and condominium investments that were a 

significant portion of total residential construction during that earlier period. For example, the number of 

permits for buildings with 5 units or more fell from 

about 34,000 in 1986 to less than 4,000 in 1988 -- an 89 

percent decline in just two years. 

Today’s situation may not be analogous to that of the 

1980s, however, because there are a number of factors 

that would seem to make a sharp and sustained downturn 

in residential construction unlikely. Employment 

growth has moderated but remains above the national 

average, with corporate expansions and relocations attracting residents from other parts of the country. The 

Region’s achievement of increased diversification has 

lessened its dependence on oil and gas today as compared to ten years ago. Additionally, housing affordability is still a plus for the Region, with above average 

income growth and below average housing prices. Nevertheless, given the rapid growth of residential construction in some parts of this Region, close monitoring of economic fundamentals by lenders is warranted 

to ensure that demand keeps pace with supply. 

Commercial Real Estate Markets 

Office vacancy rates continued to decline in most major 

TABLE 2
 

DOWNTOWN OFFICE VACANCY RATES

(PERCENT)

SUBURBAN OFFICE VACANCY RATES

(PERCENT)

SEP 96 JUN 96 SEP 95 SEP 94

ALBUQUERQUE 13.6 12.4 10.6 14.3

AUSTIN 16.0 16.6 19.5 22.6

DALLAS 35.5 33.7 34.9 35.2

DENVER 15.8 15.7 14.5 14.5

FT. WORTH/ 21.3 19.6 19.0 18.4

ARLINGTON

HOUSTON 22.4 21.9 21.8 23.5

OKLAHOMA 26.8 28.9 31.2 29.1

CITY

NATIONAL 14.4 14.6 16.1 16.3

SOURCE: CB COMMERCIAL/TORTO WHEATON RESEARCH

Regional Outlook 

SEP 96 JUN 96 SEP 95 SEP 94

ALBUQUERQUE 5.7 5.1 5.0 8.2

AUSTIN 6.2 6.4 7.0 9.9

DALLAS 11.3 12.5 14.5 18.6

DENVER 10.7 10.7 10.7 12.5

FT. WORTH/ 12.3 13.7 17.0 15.9

ARLINGTON

HOUSTON 18.5 18.8 19.4 20.6

OKLAHOMA 8.4 10.1 14.2 19.0

CITY

NATIONAL 11.7 12.2 13.8 15.6

SOURCE: CB COMMERCIAL/TORTO WHEATON RESEARCH

14 First Quarter 1997 

PROTOTYPE
 
 

 

 

 

 

 

 

 

 

 

 

Regular Features The Regional Economy
 

suburban markets within the Dallas Region, while 

remaining stubbornly high in a number of downtown 

areas, according to CB Commercial/Torto Wheaton real estate 

data. In every case, vacancy rates 

in suburban markets were much 

lower than in the central business 

districts around the Region. 

This difference in vacancy rates between downtown 

and suburban office markets can be seen clearly by 

examining Tables 1 and 2 (previous page). Businesses continue to seek areas with an ample supply of 

land, easy access, better amenities, and an abundant 

labor force. Often, it is the suburban office markets 

that better meet these criteria. As a consequence, 

Dallas-Ft. Worth, Houston and Oklahoma City continue to be plagued by high downtown vacancy rates. 

Recent purchases and lease transactions in Dallas and 

Houston are stimulating commercial real estate prices 

and lease rates, but they still remain at a substantial 

discount compared to markets outside the central business district. Meanwhile, Albuquerque, Austin, Dallas, Denver, and Oklahoma City are enjoying suburban 

office vacancy rates that are below the national average. Banks in the Dallas Region have been taking advantage of the increased commercial real estate activity by 

expanding their portfolios in that sector. While each 

market is different and FDIC surveys have not signaled 

underwriting deterioration, the growing exposures could 

leave portfolios vulnerable if an overbuilding situation 

occurs. 

Summary: Although the Dallas Region continued to 

exhibit faster growth in employment and income than the 

U.S. in 1996, area forecasters are calling for growth in 

the Region to moderate in 1997. Nevertheless, these 

forecasters expect the Region to continue to outpace the 

U.S. in growth in jobs and income once again in 1997. 

Adrian R. Sanchez, Regional Economist 

Regional Outlook 15 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 Dallas 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 

TABLE 1

Dallas Region’s banks fared slightly better. The value of 

securities holdings for all Call Report filers in the Region declined by only 1.42 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 1996 

5.0 

5.5 

6.0 

6.5 

7.0 

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

11/25/96 

1/1/96 

7/1/96 

Source: Bloomberg 

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	 16 First Quarter 1997 

PROTOTYPE
 

 

 

 

 

 

 

 

 

 

 

Regular Features Financial and Commodity Markets
 

price of each instrument. 

The Dallas 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 Dallas Region’s banks. The Dallas Regional 

Bank Index (DRBI), created by the Division of Insurance (DOI), consists of the Dallas Region’s 8 members of the American Banker Bank Index, which includes the 225 largest publicly-traded banks or bank 

holding companies. The DRBI, which is weighted by 

total market value of shares outstanding, has gained 

34 percent on the year but has underperformed the 

S&P Bank Index (see Chart 2). The DRBI does not 

share any institutions with the S&P Bank Index. 

CHART 2
 

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

A recent 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 (next 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 

The Dallas Region's Banks Outperform the S&P 500 

but not the S&P Bank Index 

-10% 

0% 

10% 

20% 

30% 

40% 

50% 

5-Jan

26-Jan

16-Feb

8-Mar

29-Mar

19-Apr

10-May31-May

21-Jun

12-Jul

2-Aug

23-Aug13-Sep

4-Oct

25-Oct

15-Nov

6-Dec 

Change from 1/01/96 

S&P Bank Index 

S&P 500 

Dallas Regional Bank Index 

Sourc es: Bloom ber g, Am erican Bank er 

Regional Outlook 17 First Quarter 1997 

PROTOTYPE
 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 sheet structure. 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 

-100 

0 

100 

200 

300 

196019661972197819841990 

5-year, 3-month Spread 

(bp) 

0 

40 

80 

120 

160 

Relative Bank Stock 

Performance 

(1953=100) 

--- Yield Curve Spread 

Sources: Merrill Lynch, Federal Reserve Board

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

Regional Outlook 18 First Quarter 1997 

PROTOTYPE
 

 

 

 

 

Regular Features Financial and Commodity Markets
 

CHART 4 TABLE 2
 

Prices R eceived by Farm ers 

Septem ber 1993 - O ctober 1996 

$0 

$1 

$2 

$3 

$4 

$5 

$6 

$7 

$8 

9/19933/19949/19943/19959/19953/19969/1996 

Per Bushel 

W heat Corn 

Soybeans 

Source : USDA

MAJOR COMMODITY RANKINGS

BASED ON 1994 CASH RECEIPTS

CO NM OK TX

CATTLE

DAIRY

NURSERY

WHEAT

BROILERS

HAY

COTTON

CORN

CHILI PEPPERS

1

4

2

5

3

1

2

5

3

4

1

5

4

2

3

1

3

4

5

2

SOURCE: USDA

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 

contract highs reached earlier in the year. 

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 major agricultural commodities for states in the Dallas 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 crop producers also should be supported 

by the first of seven fixed-support payments under the 

1996 Farm Bill.

 Allen Puwalski, Banking Analyst

 Steven E. Cunningham, Senior Financial Analyst 

Regional Outlook 19 First Quarter 1997 

PROTOTYPE
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Regular Features	 Regional Banking
 

Current Regional Banking Conditions
 

• 	 Earnings performance for the Dallas Region continues to be favorable even with rising provision and 

overhead costs. Third quarter year-to-date return on assets (ROA) of 1.26 percent improved modestly 

over the year-end 1995 ROA of 1.21 percent. 

• 	 Noncurrent loan increases outpace provision expenses since 1994, reducing reserve coverage on noncurrent loans from 182 percent at year-end 1994 to 142 percent as of the third quarter. 

• 	 The 1996 “Freedom to Farm” Bill phases out the government safety net and will require focused 

attention to risk management by producers and their lenders as the government transfers risk back to 

the private sector. 

Banking in the Dallas Region continues to be robust during the third 

quarter of 1996. Operating performance is favorable, capital levels 

are strong, and asset quality appears satisfactory despite recent 

signs of modest deterioration. Advancing net interest 

margins and modest improvement in noninterest income continue to bolster the Region’s earnings performance despite rises in noninterest expense and loan 

loss provisions. The rise in noninterest expense was 

driven primarily by the one-time SAIF special assessment (see Saif Capitalized.) Increased provision 

expenses reflect a modest but continuing trend of 

rising loan delinquencies. 

There are some hints of modest deterioration in asset 

quality which may warrant attention. Past due and 

nonaccrual volumes have risen slowly but steadily 

since year end 1994, when they registered 2.0 percent, 

to their current level of just under 2.5 percent. More 

recently, past due loans and nonaccrual loans increased in virtually every lending type during the 

quarter. Similarly, the volume of charged off loans, 

now at 0.33 percent as compared to 0.18 percent at 

year-end 1994, is rising as well. Commercial loans, 

which are growing fastest, have the largest growth in 

past due and noncurrent loans. 

Deteriorating consumer credit quality in the Region is 

consistent with national trends. Credit card delinquencies in the Dallas Region were at 2.2 percent, and 

charge-offs were 2.4 percent at year-end 1994; by the 

end of the third quarter, these figures had grown to 3.0 

percent and 3.2 percent, respectively. It should be 

noted, however, that the Region’s $4.6 billion in 

credit card loans amount to only 2.9 percent of total 

loans in the Region and represent only 2.1 percent of 

credit card loans nationwide. Although the full extent 

of the consumer credit problemremains yet to be seen, 

modest participation in credit card lending should 

help insulate this Region’s banks from the adversity 

other parts of the country may face. 

A subtle but evident shift from residential real estate 

and consumer loans to commercial and commercial 

real estate (including construction and land development loans) continues. Since 1994, consumer and 

residential loans have declined from 44.7 percent of 

total loans to 42.0 percent at the end of the third 

quarter of 1996. During the same period, commercial 

and commercial real estate loans have increased from 

42.2 percent to 45.7 percent. 

Growth trends vary considerably for banks in different 

asset size categories. The fastest growth was in 

banks with assets between $500 million and $1 

billion, where loans grew at an annualized pace of 

26 percent during the third quarter of 1996, apparently fueled by strong middle-market loan demand, 

especially construction and land development. 

Commercial Real Estate Activity 

Commercial real estate markets have improved considerably from five years ago. Absorption rates are up, previously depressed or stagnant lease rates are 

escalating, and commercial real estate prices are moving higher. As a 

result, commercial real estate portfolios are expanding. Interestingly, 

banks with less than $500 million in assets have the 

largest share of commercial real estate loans. They 

also have put most new loans of this type on the books 

Regional Outlook	 20 First Quarter 1997 

PROTOTYPE
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Regular Features Regional Banking
 

over the past 12 months. Real estate development 

based on above average economic activity (in some 

cases “booming” activity such as Denver and Austin) 

will need to be monitored carefully, if the economy 

cools off as many are predicting (see Regional Economy). In fact, articles have appeared recently in the 

Wall Street Journal and the Denver Post questioning 

whether some sectors of the Denver real estate market 

are overbuilt or if the expected decline in job growth 

will jeopardize the heightened real estate activity that 

Denver is now enjoying. Bankers need to be aware of 

real estate market conditions so that they can appropriately assess and manage the risk in their portfolios. 

Many private sources, in addition to the FDIC and the 

Federal Reserve Banks, provide good information on 

market conditions, much of which can be found on the 

Internet 

Ag Banks - Past the Drought and into the 

1996 Farm Bill 

Collectively, “farm banks” in the Dallas Region have 

favorable capital positions and operating results (see 

Table 1). These strengths played 

an important role in their ability to 

weather the effects of last summer’s drought that was pervasive 

throughout most of the Region. 

Generally, these banks have better 

operating performance, capital protection, and underwriting disciplines than farm banks in the early to 

mid-1980s. 

The 1996 Farm Bill could expose agricultural producers and consequently their lenders to new risks 

TABLE 1

that will have to be managed. Increased price volatility for commodities is expected, given that all producers 

(with the exception of fruit and vegetable farmers) are 

now free to determine the type of crop they wish to grow 

and the amount of acreage they wish to allocate. A 

phase out of the federal price support safety net over 

seven years is expected to result in greater income 

volatility to farmers. Unlike years past, the transition 

payments are fixed amounts and do not depend on the 

type or amount of crop produced. Accordingly, farmers 

will need to employ disciplined risk management tools. 

The need to employ newly developed risk management 

products will require additional time and resources for 

both the producer and their lenders. According to a 

Texas A&M University analysis entitled “New Farm 

Bill: Watershed Change in Policy,” “[p]roducers’ ability to manage risk will be a more important determinant 

of who survives. Futures markets, contract markets, 

cooperative pooling, and price insurance will become 

more important survival tools for farm managers. This 

gives a definite advantage to farm units that can 

afford to allocate resources to specialize in risk management.” Similar pressures facing the small producer 

could face small ag banks: additional risks and limited 

resources to manage them. 

Since the average size of the farm bank in the Dallas 

Region is only $48 million, the growing complexity of 

successfully managing risk could prove taxing. Fortunately, the Farm Bill also includes development of an 

Office of Risk Management for the administration of 

crop insurance and educational programs for risk management. Nevertheless, the removal of the government 

safety net and transfer of risk may put small banks with 

fewer resources at a disadvantage compared to larger 

banks. These disadvantages could take the form of 

BANKS WITH AG LOANS THAT EXCEED 100% OF TIER 1 & 25% OF GROSS LOANS

STATE # OF BANKS AVG TIER 1% TOTAL ASSETS AVG ROA

TEXAS

OKLAHOMA

NEW MEXICO

COLORADO

159

106

7

54

9.94%

10.45%

10.66%

10.10%

$8,190

$4,203

$564

$2,762

1.18%

1.11%

1.19%

1.48%

TOTAL 326 10.06% $15,719 1.20%

SOURCE: BANK CALL REPORTS

Regional Outlook 21 First Quarter 1997 

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Regular Features Regional Banking
 

increasing overhead or greater credit risk. 

Coupled with these increased risks is an increase in 

banks’ exposure to farm debt, both in terms of loans 

outstanding and market share. According to the USDA, 

as of year-end 1995, the $60 billion of farm debt held by 

banks amounted to 40 percent of the nation’s farm debt 

outstanding, as compared to $44.8 billion in 1990, or 33 

percent of the total outstanding. This increased level of 

exposure, coupled with the additional risk potential 

bought on by the 1996 Farm Bill, underscores the importance of risk management for agricultural producers and 

lenders. 

There are many sources of information available to 

those who wish to become more familiar with the key 

components of the 1996 Farm Bill. The USDA and 

Texas A&M University both provide excellent informational resources to learn more about the Farm bill and 

its economic implications. The USDA’s Internet address is http://www.USDA.gov and Texas A&M’s address is http://afpc1.tamu.gov. 

Alan C. Bush, Senior Regional Analyst 

Regional Outlook 22 First Quarter 1997 

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