Regional Outlook
 

FEDERAL DEPOSIT INSURANCE CORPORATION	 SECOND QUARTER 1999 

FDIC
 

Dallas
 

Region
 

Division of
 

Insurance
 

Alan C. Bush,
 

Regional Manager
 

Adrian R. Sanchez,
 

Regional Economist
 

Jeffrey A. Ayres,
 

Senior Financial
 

Analyst
 

Stephen L. Kiser,
 

Economic Analyst
 

In Focus This Quarter 

◆ Economic Conditions and Emerging Risks in Banking—This article 

provides an overview of economic conditions and banking industry trends, with a 

primary focus on potential risks to insured depository institutions. 

● Economic Developments—Low interest rates, dormant inflation, and rising 

stock markets have all contributed to a generally positive near-term outlook for 

the U.S. economy. See page 3. 

●	 Trends Affecting Banking Lines of Business—Although credit conditions 

appear strong, risks exist in the major banking lines of business.	 See page 7. 

Consumer Lending—Continued high consumer loan loss rates raise questions 

about how lenders will fare under less favorable economic circumstances. 

See page 8. 

Commercial Lending—Corporate loan growth accelerated in 1998 even as the 

corporate sector showed signs of stress. See page 9. 

Commercial Real Estate and Construction Lending—Selected metropolitan 

markets are experiencing rapid commercial development despite declining 

indicators of demand. See page 10. 

Agricultural Lending—Falling commodity prices threaten U.S. farm operators. See page 11. 

Funding and Interest Rate Risk—Intense competition and the changing term 

structure of interest rates have presented challenges for banks and thrifts. 

See page 12. 

● Indicators of Industry Performance—Weaknesses appear to be developing for 

banks with certain types of exposures, and the dispersion in performance among 

insured institutions is increasing. See page 13. 

By the Analysis Branch Staff 

Regional Perspectives 

Despite sluggish fourth-quarter profits, insured institutions’ performance for calendar year 1998 remains strong...Stress on the agricultural industry has yet to spill 

over into farm bank performance...The Region’s economy is expected to experience 

slower growth in 1999, but it will still outpace the nation...Consumer spending, 

which has been key to the Region’s growth, may increase consumer credit risk to 

banks...While consumer specialty banks in the Region are few, there is a significant 

aggregate exposure to consumer debt. See page 16. 

By the Dallas Region Staff 

A Publication of the Division of Insurance 
The Regional Outlook is published quarterly by the Division of Insurance of the Federal Deposit 

Insurance Corporation for the following eight geographic regions: 

Atlanta Region (AL, FL, GA, NC, SC, VA, WV)
 

Boston Region (CT, MA, ME, NH, RI, VT)
 

Chicago Region (IL, IN, MI, OH, WI)
 

Dallas Region (CO, NM, OK, TX)
 

Kansas City Region (IA, KS, MN, MO, ND, NE, SD)
 

Memphis Region (AR, KY, LA, MS, TN)
 

New York Region (DC, DE, MD, NJ, NY, PA, PR, VI)
 

San Francisco Region (AK, AZ, CA, FJ, FM, GU, HI, ID, MT, NV, OR, UT, WA, WY)
 

Single copy subscriptions of the Regional Outlook can be obtained by sending the subscription 

form found on the back cover to the FDIC Public Information Center. Contact the Public Information Center for current pricing on bulk orders. 

The Regional Outlook is available on-line by visiting the FDIC’s website at www.fdic.gov/ 

publish/regout. For more information or to provide comments or suggestions about the Dallas 

Region’s Regional Outlook, please call Alan Bush at (972) 761-2072 or send an e-mail to 

abush@fdic.gov. 

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 of this publication was obtained from publicly available sources that are considered 

reliable. However, the use of this information does not constitute an endorsement of its accuracy by 

the Federal Deposit Insurance Corporation. 

Chairman Donna Tanoue 

Director, Division of Insurance Arthur J. Murton 

Executive Editor George E. French 

Editors Lynn A. Nejezchleb 

Maureen E. Sweeney 

Publications Manager Teresa J. Franks 
In Focus This Quarter
 

Economic Conditions and
 

Emerging Risks in Banking
 

Periodically, the Division of Insurance assesses conditions in the economy and across the banking industry in an effort 

to evaluate the types of risks that could adversely affect the performance of insured depository institutions. The analysis that follows describes the salient aspects of this assessment by focusing on three areas: 1) developments and conditions in the U.S. and global economies; 2) trends affecting particular banking lines of business; and 3) selected 

indicators of bank performance. 

In brief, the U.S. economy continues to provide a favorable environment for the banking industry. The industry as a 

whole has exhibited strong loan growth and minimal credit losses. Nevertheless, there are areas of concern, including subprime and high loan-to-value consumer lending, higher levels of leveraged commercial lending, localized 

overbuilding of commercial real estate, and the potential for credit quality problems among agricultural banks. 

Although it is uncertain when, or even if, these concerns will ultimately affect overall industry performance, the 

potential for stress among insured institutions is being monitored. 

Economic Developments
 

Conditions Have Improved Markedly 

since Late 1998 

The U.S. economy is now in its eighth year of expansion, the longest peacetime expansion during the postWorld War II era. Although analysts raised concerns 

about the durability of the expansion amid the late-1998 

financial market turmoil, the economic outlook since 

that time has improved for a number of reasons: 1) the 

75 basis point reduction in short-term U.S. interest rates 

between September and November helped to support 

consumer spending and business investment; 2) following several quarters of decline, U.S. exports rose unexpectedly during the fourth quarter; 3) inflation remained 

dormant even though U.S. labor markets were extremely tight; and 4) equity valuations for large-cap stocks 

rebounded and erased most of the losses incurred during August and September. 

Consumer Spending and Business Investment 

Are Key to Economic Strength 

Most of the standard indicators of health for the U.S. 

economy currently register values associated with the 

best macroeconomic conditions in our history. Growth in 

real gross domestic product (GDP) was 3.9 percent for 

all of 1998—the third consecutive year in which growth 

exceeded 3.5 percent. The U.S. economy added over 3.1 

million jobs during 1998, while unemployment averaged 

just 4.5 percent, the lowest annual figure since 1969. 

Despite this robust economic activity, inflation was also 

the lowest in a generation. Consumer prices rose by just 

1.6 percent in 1998, extending a seven-year streak during which prices have risen by less than 3 percent per 

year. At the same time, strong gains in the productivity 

of U.S. workers helped real hourly earnings rise by 2.7 

percent—the best performance since 1972—while unit 

labor costs of businesses rose by only 1.9 percent. 

Growth in business investment spending, which typically peaks in the early years of an economic expansion, 

has actually accelerated during the current expansion 

(Chart 1, next page). A number of factors appear to be 

responsible for this investment boom. One is the need 

for producers to invest in new technologies in order to 

cut costs and remain competitive. Also, rising stock 

prices, low interest rates, and low yield spreads during 

the past few years have helped keep the cost of capital 

relatively low. The result has been an economic expansion in which approximately 20 percent of net growth in 

real GDP has come from investment in producers’ 

durable equipment, versus approximately 10 percent 

during the long expansions of the 1960s, 1970s, and 

1980s. Bank commercial and industrial lending has 

expanded at an average annual rate of 10.6 percent over 

the past five years, largely on the strength of business 

investment spending. 

The underlying factors that drive consumer spending 

are strong. Low unemployment and rising real incomes 

have boosted the Conference Board’s consumer confiDallas Regional Outlook 3 Second Quarter 1999 
In Focus This Quarter
 

CHART 1 

Low Interest Rates and High Stock Prices
 

Fuel Consumption and Investment
 

Personal Consumption Investment in Producers’ 

Expenditures* (%) Durable Equipment* (%) 

20 9 

15 7
 

5
 10 

3 5 

1 

0 –1 

–5 –3
 

–5
 –10 

* Annual Inflation-Adjusted Rate of Change 

Source: Bureau of Economic Analysis 

1990–91 

Recession 

’89 ’90 ’91 ’92 ’93 ’94 ’95 ’96 ’97 ’98 

dence index to its highest values since the late 1960s. 

Increases in new home construction reflect these favorable conditions. Almost 1.5 million new homes were 

completed during 1998—the highest level in ten 

years—while a record 4.8 million existing homes were 

sold (Chart 2). U.S. automobile sales reached 15.5 million in 1998, their best performance since 1986. Low 

interest rates also enabled a record number of homeowners to reduce their monthly interest expenses by 

refinancing their mortgages during 1998.1 

Although real disposable personal income grew by 

more than 3 percent during 1998, personal savings was 

essentially zero during the fourth quarter. This was the 

1 The Refinancing Index of the Mortgage Bankers Association posted an all-time high of 4,389 in the second week of October 1998. The 

index is scaled to a level of 100 as of the third week of March 1990. 

CHART 2 

Housing Starts and Home Sales Reflect the 

Strength of the Consumer Sector 

Sources: U.S. Census Bureau; National Association of Realtors 

2,250 

2,750 

3,250 

3,750 

4,250 

4,750 

5,250 

5,750 

’86 ’87 ’88 ’89 ’90 ’91 ’92 ’93 ’94 ’95 ’96 ’97 ’98 ’99 

One-Unit 

Housing 

Starts (000’s) 

550 

650 

750 

850 

950 

1,050 

1,150 

1,250 

1,350 

1,450 

1990–91 Recession 

Existing 1- to 

4-Family 

Sales (000’s) 

lowest rate of personal savings recorded in the United 

States since the Great Depression. The decline in personal savings has prompted much discussion of its causes and potential implications for the economy and for 

consumer credit quality. Most analysts have argued for 

the importance of a “wealth effect” from rising stock 

values on consumer spending.2 They note that although 

consumers are saving little out of current income, 

household wealth continues to grow rapidly, driving 

consumer spending higher. The willingness of American consumers to spend has been a prime factor in prolonging the economic expansion for the United States 

and in supporting the economies of countries around the 

world that depend on exports to the United States. This 

high degree of reliance on the U.S. consumer has led 

analysts to voice concerns that the wealth effect might 

reverse itself, leading to a sharp drop in consumer 

spending if there is a sustained stock market decline. 

Conditions Vary across Industry Sectors 

While overall conditions in the U.S. economy are good, 

certain sectors have been undergoing significant strain 

because of low commodity prices and weak foreign 

demand. 

Commodity price weakness extends across a wide range 

of items, from agricultural goods to industrial commodities to basic manufactured goods (Chart 3). 

Among agricultural commodities, grain prices have 

fallen substantially from their record-high levels of just 

three years ago, while prices for hogs and soybeans have 

also been under severe pressure. Industrial commodity 

prices have fallen sharply, with steel prices down by 

nearly 30 percent since January 1997. Certain manufactured goods show a similar pattern. The price of the 

industrial chemical benzene has fallen by 40 percent 

since January 1997, while the price of computer memory chips fell by more than 80 percent during that time. 

Oil prices decreased by nearly 50 percent between January 1997 and February 1999. Since mid-March, however, oil prices have increased as a result of agreements 

among oil producers to limit output. Analysts are uncer2 Personal savings is measured as the difference between disposable 

personal income (personal income less tax payments) and total consumption outlays. Increasing household wealth may reduce personal 

savings either through a reduction in disposable income or through 

increased consumption outlays. Tax payments resulting from capital 

gains will reduce measured disposable personal income. Increasing 

household wealth may lead to higher consumption outlays by means 

of the wealth effect. 

Dallas Regional Outlook 4 Second Quarter 1999 
0 

In Focus This Quarter
 

CHART 3 

Price Weakness Extends across 

a Wide Range of Commodities 

Percent Decline in Prices from January 1997 to March 1998 

All 

commodities* Tin Steel Wheat Benzene Crude Oil 

–5 

–5.3%
 

–10
 –7.7%
 

–15
 

–20
 

–25
 

–30 –29.1%
 

–35
 

–36.2%
 –40
 

–40.6%
 –45
 

–50
 –47.4% 

* Producer Price Index (PPI)
 

Source: Journal of Commerce, Bureau of Labor Statistics
 

tain how long any reductions in output will be maintained or how much oil prices may increase during the 

next several months. 

Three trends in the global economy appear to be responsible for weak commodity prices. First, sustained low 

inflation has taken root both in developed nations and in 

many emerging economies. Low inflation has eliminated much of the speculative demand for commodities 

that was evident during the 1970s. Low inflation has 

also made it difficult for manufacturing firms to raise 

prices, while at the same time encouraging the implementation of new technologies to cut costs. Second, 

large-scale investment in plant and equipment during 

the 1990s in both developed and emerging countries has 

added vast amounts of new global manufacturing 

capacity, making industrial overcapacity a source of 

price weakness in a number of industries. Third, successive currency crises and the resulting recessions that 

have taken place in Asia, Eastern Europe, and Latin 

America have reduced global demand for commodity 

goods. Moreover, U.S. firms find that their products are 

less price competitive abroad because of the relative 

strength of the dollar. 

One reason the overall U.S. economy has proven so 

resilient in the face of weakness in the manufacturing 

sector is that firms have been able to restructure to cut 

costs and improve their market positions. Global overcapacity in industries such as oil and autos has been a 

driving force behind the record number and dollar value 

of merger deals announced during 1998. Mega-mergers 

involving Exxon-Mobil and Daimler Benz-Chrysler 

helped push the dollar volume of mergers announced in 

1998 to almost $1.2 trillion—nearly double the level 

announced in 1997 and far greater than any year during 

the “merger mania” of the 1980s (Chart 4). 

U.S. Foreign Trade Reflects Recent Turmoil 

in the Global Economy 

The U.S. economy increasingly relies on exports to fuel 

its overall growth. Between 1994 and 1997, export 

growth contributed about 1 percentage point each year 

to total net growth in real GDP. However, with the onset 

of the Asian economic crisis in 1997, the export sector 

stalled and became a drag on overall U.S. economic 

activity. During the first three quarters of 1998, exports 

decreased at an annualized rate of 4.4 percent, led by 

declines in capital goods, industrial material and supplies, and food and agricultural products. Weakness in 

exports was not limited to Asia; in fact, Canada, Mexico, and South America were also weak markets for U.S. 

goods and services during most of 1998. Declining 

goods exports and rising imports combined to push the 

U.S. balance of trade to a record deficit of $169 billion 

during 1998—a 50 percent increase from the year 

before. The trade deficit continued to increase in early 

1999. Data for January show an imbalance of nearly 

$17 billion, the largest monthly deficit ever recorded. 

Despite the weakness in foreign demand that was 

observed during much of last year, U.S. exports rose 

sharply at the end of 1998. Total exports jumped by 19.7 

percent during the fourth quarter, contributing 2.0 percent of the total 6.0 percent growth in GDP during the 

CHART 4 

0 

1,000 

2,000 

3,000 

4,000 

5,000 

6,000 

7,000 

8,000 

9,000 

0 

200 

400 

600 

800 

1,000 

1,200 

1,400 

Deal Value 

(Billions $) 

(Columns) 

Number of 

Deals (Line) 

Source: Houlihan Lokey’s Mergerstat 

Pressure to Maintain Profit Margins 

Has Led to Record Merger Activity 

Recessions 

’65 ’67 ’69 ’71 ’73 ’75 ’77 ’79 ’81 ’83 ’85 ’87 ’89 ’91 ’93 ’95 ’97 

Dallas Regional Outlook 5 Second Quarter 1999 
In Focus This Quarter
 

quarter. This unexpected increase in U.S. exports 

involved nearly every region of the world except Eastern Europe. Export shipments increased across most 

product types, with the greatest increase in activity 

observed in capital goods. 

The Outlook for the Global Economy 

Remains Uncertain 

Developments during the past six 

months have resulted in an 

improved outlook for the global 

economy, but some key uncertainties remain. While the global 

financial system is more stable 

today than it was six months ago, 

some of the world’s most important economies either 

remain in recession or are experiencing slower growth. 

In this environment, the potential remains for shocks to 

arise in the global economy that could adversely affect 

the performance of the U.S. economy and the credit 

quality of insured depository institutions. 

Canada. The Canadian economy is healthier than at any 

time during the past several years. Canada’s economy is 

expected to track overall growth in the United States, in 

part because U.S. demand for goods and services is the 

principal support for Canadian exports. Canada’s relatively high dependence on weak commodity industries, 

such as metals, grains, and livestock, poses risks for 

producers and for local economies closely tied to these 

commodities. 

Mexico. Mexican GDP growth was 4.6 percent in 1998, 

reflecting relatively strong employment and wage gains, 

high levels of foreign direct investment, and robust nonoil export growth. Looking ahead, inflation remains a 

concern. At the end of 1998, the inflation rate was 18.7 

percent, up from a low of 15 percent in the middle of the 

year. The Blue Chip Economic Indicators consensus 

forecast calls for real GDP growth of 2.9 percent during 

1999, down from 4.6 percent in 1998. 

Western Europe. Europe’s problems are similar to 

those of the United States in that they stem from declining growth in manufacturing exports. Despite a 175 

basis point cut in short-term interest rates in the U.K. 

since October 1998, the Bank of England forecasts economic growth of less than 1.0 percent in 1999. In Germany, manufacturing activity has also decreased, owing 

to weakness in export markets. German GDP shrank by 

0.4 percent during the fourth quarter of 1998, while 

unemployment remains above 10 percent. In response to 

signs of growing weakness in Germany and other major 

economies in the 11-member “Euro-zone,” the European Central Bank cut short-term interest rates by 50 

basis points to 2.5 percent on April 8, 1999. 

Eastern Europe. Much of Eastern Europe is faced with 

slow growth or recession following the devaluation of 

the ruble and the default on Russian government debt in 

August 1998. The Russian economy shows few signs of 

recovery amid high inflation and halting progress in 

economic reform. Poland and Hungary, Eastern 

Europe’s engines of growth before the Russian crisis, 

are facing rising current account deficits and a slowdown in export growth. 

Asian Pacific Rim. The Japanese economy remains 

mired in a long-running recession that has resulted in a 

greater number of bankruptcies (up 17 percent in 1998), 

falling domestic demand, and pessimism among consumers and businesses alike. Japanese GDP fell by 2.8 

percent during 1998, and analysts call for a drop of 0.8 

percent in 1999. 

There are signs that the worst phase of the Asian economic crisis may have passed.3 In the Philippines, South 

Korea, Hong Kong, and Thailand, current accounts have 

moved from deficit to surplus as devalued currencies 

continue to depress imports. Foreign capital is returning 

to the region, as evidenced by the 27 percent increase in 

foreign direct investment in Korea during 1998. However, weak consumer spending remains a problem for 

the entire region, which ships fully 40 percent of all 

exports to other Asian Pacific Rim nations. 

In China, which has been relatively immune to the worst 

of the region’s economic crisis, slower growth is also 

forcing economic restructuring. With annual economic 

growth below the targeted 8 percent mark, economic 

planners have been forced to reduce production and 

close plants in the oil, steel, glass, and cement industries. Meanwhile, the government is trying to stimulate 

demand by investing in public infrastructure and by urging banks to increase lending to the private sector. 

3 See “The Asian Economic Crisis: Implications for the U.S. Economy,” Regional Outlook, Third Quarter 1998. Also available at 

http://www.fdic.gov/publish/regout/ro19983q/ny/infocus1.html. 

Dallas Regional Outlook 6 Second Quarter 1999 
In Focus This Quarter
 

Latin America. With the apparent stabilization of the 

Asian economies, attention has now focused on emerging problems in Latin America. The 50 percent devaluation of the Brazilian real versus the dollar that began in 

January 1999 has depressed economic activity and 

renewed fears of inflation. Consensus estimates place 

Brazilian economic growth at negative 3.5 percent for 

1999, while short-term interest rates are likely to remain 

high (currently about 42 percent) to prevent further capital flows out of the country. 

Risks Remain despite a Positive 

U.S. Economic Outlook 

Robust economic growth, low inflation, and stable 

interest rates appear to be the most likely economic scenario for the remainder of 1999, according to the consensus forecast of the Blue Chip Economic Indicators. 

If this outlook actually comes to pass, we can expect 

that the vast majority of insured institutions will continue to enjoy moderate loan growth and generally favorable indicators of financial performance and condition. 

Despite this positive outlook, the risk remains that the 

expansion could be derailed by one of three types of 

shocks. The first would be a resurgence of inflation 

resulting from demand-induced shortages of labor or 

other key economic resources. Although inflation has 

been consistently low in recent years, investors remain 

on the lookout for any signs of higher prices. While it is 

not certain that a recession would result, it is worth noting that rising short-term interest rates in response to 

increasing inflation have preceded every recession during the past 40 years. 

The second type of shock that could end the expansion 

is a sustained period of deflation. Concern about deflation arises from the low prices many commodity producers are receiving and the effects of foreign currency 

devaluations on U.S. import prices. Although these 

trends have helped to keep U.S. inflation and interest 

rates low, at some point they could impose a heavier 

burden on U.S. businesses by shrinking revenues and 

profit margins, mirroring what has already occurred in 

some commodity-based industries.4 

The third type of shock is financial market instability. 

Consumer confidence, which has reflected recent 

increases in stock market wealth, could tumble in the 

event of a severe and prolonged decline in the stock 

market. Business investment has also depended on the 

support of strong and stable financial markets that offer 

firms access to capital on favorable terms and facilitate 

restructuring in troubled industries. A recession accompanied by financial market instability could pose a particular threat to bank loan performance because it would 

likely produce a disorderly shakeout of troubled firms 

marked by a rise in bankruptcies and loan defaults. 

4 See “How Will the Expansion End?” Regional Outlook, Second 

Quarter 1998. Also available at http://www.fdic.gov/publish/regout/ 

ro19982q/sf/infocus2.html. 

Trends Affecting Banking Lines of Business
 

Overview 

Trends in bank and thrift lines of business align closely 

with those of the economy. Most insured institutions 

have prospered during this economic expansion, as 

shown by the industry’s continuing earnings growth, 

strong capital levels, and improving or stable loan performance across most major loan categories. Likewise, 

today’s strong economy depends to a great extent on the 

continuing availability of consumer and business credit 

from banks and thrifts. Even during the closing months 

of 1998, when capital market funding sources became 

quite volatile, credit continued to flow from insured 

institutions. During that turbulent period, insured institutions may have acted as a stabilizing force for businesses, consumers, and farmers by continuing to provide credit, albeit at higher prices and with stricter 

underwriting terms in some cases. 

Although credit conditions appear strong, a number of 

insured institutions’ loan portfolios are shifting toward a 

riskier mix of credits. Underlying reasons for these 

shifts vary, but likely explanations include opportunities 

to earn higher yields and confidence about the overall 

economic outlook. The following paragraphs discuss 

credit risk trends and highlight possible areas of concern in the major lending lines of business at insured 

institutions. The influence of recent interest rate 

changes and competitive factors on asset/liability and 

credit risk management is also explored. 

Dallas Regional Outlook 7 Second Quarter 1999 
In Focus This Quarter
 

Consumer Lending 

Debt Growth Sustains Consumer Spending but 

Could Contribute to Financial Strains under 

Less Favorable Economic Conditions 

Much of the strength and stability of the overall U.S. 

economy owes itself to the continuing growth in consumer spending. While higher personal incomes and 

consumer confidence are important contributing factors, lower interest rates and expanding avenues of credit access have also played key roles in supporting 

consumer spending. With mortgage debt leading the 

way, consumer loan growth rates accelerated in 1998. 

The key factor driving mortgage loan growth was lower 

interest rates, which encouraged many consumers to 

purchase homes, refinance existing mortgages, and 

consolidate their personal debts through home equity 

loans. As a result, the growth in home mortgage credit 

during 1998 reached a post-recession high of 10 percent. Other consumer loan types, such as auto and credit card debt, grew at slower but accelerating rates of 8 

percent and 5 percent, respectively. 

Nonmortgage consumer loan loss rates remain above 

previous recession levels despite the apparent strength 

of the consumer sector. Chart 5 shows that nonmortgage consumer loss rates have declined slightly from 

their peak in the fourth quarter of 1997, but remain 

above the rates experienced during the prior recession. 

The chart also shows that consumer credit loss rate 

trends are closely related to the rise in personal bankruptcy filings, which reached an all-time high of 1.4 

million in 1998.5 The good news for consumer lenders 

is that the growth rate in personal bankruptcies has 

slowed. However, this leveling off does not mean that 

consumer credit quality concerns have abated. The 

overriding concern is how personal bankruptcies and 

consumer credit losses, already at high levels, would be 

affected by less favorable economic conditions. Another concern is whether current consumer spending patterns will be supported by a new round of credit card 

growth. Since revolving credit card balances typically 

carry higher interest rates than home equity loans, this 

5 Reasons for the rise in personal bankruptcy rates are further 

explored in a series of Bank Trends articles published by the FDIC. 

See, for example, “A Time Series Model of the U.S. Personal Bankruptcy Rate, 1970-1996,” February 1998, and “The Effect of Consumer Interest Rate Deregulation on Credit Card Volumes, 

Charge-Offs, and Personal Bankruptcy Filings,” March 1998. Both 

reports can be accessed at www.fdic.gov/publish/bktrnds/index.html. 

CHART 5 

0.0 

0.5 

1.0 

1.5 

2.0 

2.5 

3.0 

1Q91 2Q92 3Q93 4Q94 1Q96 2Q97 3Q98 

0.0 

0.2 

0.4 

0.6 

0.8 

1.0 

1.2 

1.4 

Consumer Charge-Offs and Bankruptcies 

Have Leveled Off at a High Rate 

Bankruptcy Filings 

per 1,000 Population 

(Right axis) 

Sources: Administrative Office of the U.S. Courts; Federal Reserve Board 

1.6 

Consumer Loan 

Charge-Off Rate (%) 

“reloading” of credit card debt would further strain the 

financial flexibility of consumers. 

High Loan-to-Value Mortgage Products 

and Subprime Lending Transform 

Consumer Lending 

Consumer lending practices have changed significantly 

since the last recession. Because of intense competition 

and declining net interest margins, consumer lenders 

are reaching out to borrowers further down the credit 

quality spectrum and relaxing traditional collateral 

requirements. Bank supervisors have indicated that a 

growing number of insured institutions are involved in 

some form of subprime lending. Subprime loans, 

designed for borrowers with blemished or limited credit histories, can take a variety of forms, including home 

equity, automobile, and credit card loans. As compensation for increased risk, subprime loans carry higher 

interest rates than prime-rate loans and often require 

substantial collateral margins. 

Insured institutions are also embracing another relatively new consumer loan product: high loan-to-value 

(LTV) loans. High LTV loans, where the combined 

amount of senior and junior liens against a home 

exceeds its value, are usually made to borrowers with 

“clean” or unblemished credit histories. However, the 

lack of collateral protection results in much higher loss 

experience when a borrower defaults. As Chart 6 shows, 

high LTV loans have had a higher loss rate experience 

(adjusted for seasoning) than either traditional home 

equity loans or subprime loans. Moreover, the delinquency rates on recent-vintage home equity loan pools 

Dallas Regional Outlook 8 Second Quarter 1999 
In Focus This Quarter
 

CHART 6 

0 

1 

2 

3 

4 

5 

6 

7 

0 2 4 6 8 10 12 14 16 18 20 22 

Months since Origination 

High LTV Mortgages* Have a Higher Loss 

Experience than Other Mortgage Types 

Charge-Off Rate (%) 

* Includes home improvement loans 

Source: Moody’s Investor Services 

High LTV 

Subprime 

Traditional 

Home Equity 

have deteriorated as high LTV loans have proliferated.6 

At the same time, recent regulatory surveys of credit 

underwriting practices show easing standards on home 

equity loans.7 The loss experience of these higher risk 

consumer products during less favorable economic circumstances is unknown and continues to be a concern. 

Commercial Lending 

Commercial Loan Performance Remains 

Strong but Corporate Financial Strains 

Are Developing 

Continued strength in the corporate sector is reflected in 

the level of corporate bankruptcy filings, which have 

declined since the middle of 1997 to just under 10,000 

in the fourth quarter of 1998. Bank losses on commercial credits remain low but did register a modest 

increase during the fourth quarter (see Chart 7). In addition to strong economic fundamentals in high tech, construction, finance, service-related, and other sectors, 

U.S. businesses have benefited from significantly lower 

interest rates and an abundant supply of credit. Credit 

access provided by banks was particularly important to 

U.S. businesses in the latter part of 1998. During this 

6 “Moody’s Home Equity Index Update.” Moody’s Investor Services, 

October 2, 1998, p. 3. 

7 For example, the Office of the Comptroller of the Currency’s “1998 

Survey of Credit Underwriting Practices” indicated that 33 percent of 

the banks offering home equity loans eased standards, compared with 

only 7 percent that tightened standards. The report is available at 

http://www.occ.treas.gov/cusurvey/scup98.pdf. 

period, sharply higher interest rate spreads on corporate 

bonds8 and commercial paper led many companies to 

tap cheaper funding sources, including existing unused 

credit and commercial paper lines held by commercial 

banks. As a result, commercial banks experienced a 15 

percent (annualized) rate of growth in fourth quarter 

1998, the highest rate of commercial loan growth in 16 

years. 

Although commercial loan loss rates are low, financial 

strains are becoming apparent among certain U.S. business sectors. Bank lending to U.S. businesses has grown 

at a faster pace than GDP during each of the past eight 

quarters. Moreover, growth in bank commercial lending 

through 1998 has come at a time when total after-tax 

U.S. corporate profits have begun to decline.9 Deteriorating profits are especially prevalent in sectors with 

exposure to weak commodity prices and slower export 

growth. For many businesses, lower profits have resulted in a reduced capacity to service outstanding debt 

obligations. For instance, a recent Bank of America 

Corporation study reported that amendments to syndicated loans in the latter half of 1998 were driven 

increasingly by borrowers seeking relief from financial 

performance-related covenants.10 Financial strains are 

8 The Merrill Lynch U.S. Investment Grade Corporate Bond Master 

Index indicates that corporate bond spreads over ten-year Treasury 

rates rose 58 percent, an increase of 63 basis points, from the end of 

July 1998 to the end of October 1998. 

9 See the Bureau of Economic Analysis Corporate Profit Index. 10 “Covenants Provide Loan Repricing Opportunity.” Bank of America 

Report, January 25, 1999. 

CHART 7 

0.0 

0.2 

0.4 

0.6 

0.8 

1.0 

1.2 

1.4 

1.6 

1.8 

2.0 

1Q91 3Q92 1Q94 3Q95 1Q97 3Q98 

Sources: U.S. Courts; Bank Call Reports 

Net Charge-Off Rate (%) Business Bankruptcies 

9,000 

10,000 

11,000 

12,000 

13,000 

14,000 

15,000 

16,000 

17,000 

18,000 

19,000 

20,000 

Domestic Commercial Loan Losses Remain Low 

and Business Bankruptcies Decline 

Dallas Regional Outlook 9 Second Quarter 1999 
In Focus This Quarter
 

also reflected in the level of corporate bond defaults, 

which Standard and Poor’s reported at 48 ($10.8 billion in affected debt) in 1998, up 182 percent from 1997 

levels (up 150 percent in dollar volume terms).11 

As Debt Markets Become More Cautious, 

Syndicated Lending Shifts toward Higher 

Risk Borrowers 

Although the longer-term trend has been toward more 

aggressive corporate lending strategies, many insured 

institutions responded to the financial market turmoil in 

late 1998 with a heightened sense of caution. Recent surveys of underwriting practices conducted by the federal 

banking agencies show that many banks tightened standards in late 1998 across many product lines.12 However, 

tighter lending terms do not appear to have quelled 

either loan demand or loan production substantially. 

Syndicated lending trends suggest an increase in corporate lending risks.13 Despite the flight to quality that 

occurred in the latter part of 1998, syndicated loans to 

leveraged companies jumped 41 percent to $273 billion 

during 1998. Over the same period, nonleveraged loans 

declined 35 percent to $599 billion. Although corporate 

merger activity accounts for much of the increase in 

leveraged lending volume in 1998, some lenders appear 

to be taking advantage of the higher yields available in 

this market relative to yields on lower risk credits. The 

apparent shift toward a higher risk mix of total syndicated credit outstanding is occurring at the same time 

that corporate bond defaults for speculative grade issues 

are trending upward.14 Moreover, trends in corporate 

bond spreads and rating agency actions on corporate 

bond debt suggest a bond market that is becoming 

increasingly cautious about the outlook for U.S. businesses (see Chart 8). 

11 “Corporate Defaults Rise Sharply in 1998,” Standard & Poor’s, 

March 5, 1998. 

12 See Federal Reserve Board Senior Loan Officer Opinion Surveys 

for November 1998 and January 1999, http://www.bog.frb.fed.us/ 

boarddocs/snloansurvey/. 

13 Syndicated loans are credit facilities made to medium and large corporate borrowers by a group or syndicate of lenders. Analysts often 

segment this market into “leveraged” lending (loans to heavily indebted companies) and nonleveraged lending. 

14 Moody’s Investor Services reports that trailing 12-month default 

rates for speculative-grade issuers rose from 2.02 percent at the end 

of 1997 to 3.31 percent at year-end 1998. These default rates compare 

to an all-corporate trailing default rate of 0.68 percent in 1997 and 

1.27 percent in 1998. 

CHART 8 

0.4 

0.6 

0.8 

1.0 

1.2 

1.4 

1.6 

1.8 

2.0 

4Q93 4Q94 4Q95 4Q96 4Q97 4Q98 

–120 

–80 

–40 

0 

40 

80 

120 

160 

200 

Corporate Bond Ratings and Required 

Yields Reflect Greater Market Uncertainty 

Merrill Lynch Corporate Bond 

Master Index Spreads to Comparable

 Maturity Treasuries (bps) 

Sources: Moody’s Investor Service; Merrill Lynch 

Ratio of Corporate 

Upgrades to 

Downgrades 

Commercial Real Estate and 

Construction Lending 

Construction Loan Growth Accelerates 

as Overbuilding Pressures Increase 

in Certain Markets 

In 1998, the value of private commercial construction 

rose 4.0 percent over 1997 levels, reflecting a moderate 

slowdown in growth compared with a compounded 

average annual growth rate of 8.4 percent since 1992. In 

contrast, the pace of residential development has accelerated. The value of private residential construction rose 

11.5 percent in 1998, compared with an annual average 

growth rate of 8.0 percent since 1992. Construction 

loans at insured institutions grew 20 percent in 1998, 

the highest growth rate since 1986.15 

Although market fundamentals are strong throughout 

most major U.S. markets, some metropolitan areas 

appear to be vulnerable to an oversupply of commercial 

space. The Regional Outlook, First Quarter 1999, highlighted nine markets that may be susceptible to commercial overbuilding on the basis of the following 

factors: 1) the rapid pace of current construction activity in those markets; 2) high vacancy rates relative to 

construction in progress in some cases; 3) projections of 

rising vacancy rates by market analysts; and 4) various 

recent shifts in demand indicators. Data through June 

1998 indicate that construction activity in these markets 

15 Construction loan growth captures growth in both residential and 

nonresidential development. 

Dallas Regional Outlook 10 Second Quarter 1999 
In Focus This Quarter
 

has not yet abated to reflect moderating demand levels.16 

Overbuilding concerns may be tempered to the extent 

that tighter commercial real estate lending standards 

slow the pace of development.17 

Loan Underwriting Study Reveals Sounder 

Practices Compared with the 1980s, but Intense 

Competition Forces Some Concessions on 

Pricing and Structure 

Beginning in August 1998, FDIC analysts set out to 

investigate construction loan underwriting practices in 

banks servicing various rapidly growing markets. The 

study identified several differences between today’s 

lending practices and those prevalent during the last 

cycle. Most importantly, today’s lenders are making 

credit decisions on the basis of improved appraisals, 

increased attention to project cash flows and project 

feasibility, and better market information on competing 

projects. However, intense competition has forced an 

across-the-board reduction in loan pricing margins even 

compared with margins at the height of the 1980s building boom. 

The study also identified some instances of aggressive 

loan structures, including pricing at extremely thin margins, waiving or limiting personal guarantees, waiving 

cash equity requirements, and lending on thin collateral 

margins. Borrowers who secured the most aggressive 

loan terms were typically larger developers, who presumably have the resources and financial flexibility to 

weather adverse conditions. Nevertheless, waiving personal guarantees and eliminating a borrower’s financial 

exposure to project risks are practices often cited in 

conjunction with the heavy construction loan losses 

experienced during the previous real estate downturn. 

Finally, the study found that many real estate investment 

trusts and large corporate developers have been able to 

obtain long-term unsecured financing for development 

purposes. The lack of collateral protection could make 

16 The nine markets are Atlanta, Charlotte, Dallas, Las Vegas,
 

Nashville, Orlando, Phoenix, Portland, and Salt Lake City. “Commercial Development Still Hot in Some Markets but Slower Development May Be Ahead.” Regional Outlook, First Quarter 1999,
 

www.fdic.gov/publish/regout/ro19991q/na/index.html.
 17 Consistent with commercial and industrial underwriting trends,
 

commercial real estate lenders reacted to market volatility in late
 

1998 by tightening loan terms and raising pricing margins. See, for
 

example, the Federal Reserve Board Senior Loan Officer Opinion
 

Survey for November 1998 and January 1999.
 

these loans particularly vulnerable to declining commercial real estate prices.18 

Agricultural Lending 

Farm Banks Threatened by Falling 

Commodity Prices 

Farm banks generally performed well in 1998, reporting 

a modest increase in nonperforming loans from 1.09 

percent at year-end 1997 to 1.13 percent as of year-end 

1998. Although delinquent loans rose only slightly 

in the aggregate, farm banks in some localized areas 

such as northeast North Dakota and northwest Minnesota experienced sharply higher problem loan levels 

and reduced profits in the aftermath of three consecutive years of low prices, bad weather, and crop diseaserelated problems. Moreover, recent surveys by the 

federal banking agencies, which show rising levels of 

farm carryover debt at farm banks, suggest that nonperforming loan data may understate borrower difficulties. 

During 1998, the outlook for significant portions of the 

farm sector deteriorated following a dramatic fall in 

prices for several major farm commodities. Prices for wheat, corn, 

soybeans, and hogs fell to ten-year 

lows and were below the economic breakeven cost of production for 

many producers. For areas heavily 

dependent on these commodities, 

the U.S. Department of Agriculture (USDA) projects that producers will experience 

substantial declines in net cash income from 1999 

through 2003.19 In 1999, the USDA projects farm 

income to fall 7.1 percent, to $44.6 billion, from last 

year’s level of $48 billion. 

Although current conditions have the potential to cause 

stress for substantial numbers of farm banks in certain 

regions, some significant differences exist between 

today’s circumstances and those that led to the farm 

18 Loan covenants may mitigate some of the risks of lending without 

collateral protection. Common covenants include maximum leverage 

ratios, minimum equity requirements, and limits on encumbered 

assets through recourse or cross-collateralization to third parties. 

19 A substantial portion of the USDA’s projected decline in the net 

cash income for U.S. farmers over the next five years is attributable 

to reductions in government payments to farmers. 

Dallas Regional Outlook 11 Second Quarter 1999 
In Focus This Quarter
 

bank crisis of the mid-1980s. Current favorable factors 

include 1) lower debt-to-equity for farm producers; 2) 

substantially lower interest rates; 3) moderately appreciating farmland prices relative to the more rapid appreciation (and subsequent price corrections that followed) 

in the 1970s and 1980s; and 4) better underwriting practices by farm lenders. Nevertheless, if weak exports of 

farm products and low commodity prices continue for 

the remainder of this year, the condition of farmers 

could deteriorate significantly, increasing financial 

stress at insured farm banks. 

Funding and Interest Rate Risk 

Deposit Funding Becomes 

More Difficult to Obtain 

Competitive pressures in the banking industry are not 

restricted to lending. Insured institutions are also finding it difficult to attract deposits in today’s marketplace, 

largely because of the existence of higher yielding 

investment products. For example, the Investment 

Company Institute reports that net inflows into mutual 

funds have exceeded net increases in deposit accounts 

in all but three quarters since mid-1991. The fourth 

quarter of 1998 marked the sixteenth consecutive quarter that mutual fund inflows outstripped deposit increases. As deposits have become more difficult to attract, 

loan portfolios have expanded in line with the overall 

growth in the economy. As a result, institutions have 

turned increasingly to other borrowings for funding. 

These trends are captured in Chart 9, which shows that 

the ratio of bank and thrift loans to deposits reached a 

record 88 percent in December 1998. Small community 

CHART 9 

banks and thrifts (institutions with less than $1 billion in 

assets) are most affected by deposit trends, since they 

tend to rely more heavily on deposit funding than larger institutions with greater access to the capital markets. 

Interest Rate Changes Pose Asset/Liability 

Management Challenges 

Interest margin pressures are posing challenges for 

insured institutions. In addition to the effect of competitive pressures, changes in interest rates have had a substantial influence on institutions’ net interest margins. 

The flattening of the yield curve in 1998, for example, 

appears to have contributed to a decline in margins to 

their lowest levels since 1991 for both large and small 

insured institutions (see Chart 10). For insured institutions with more traditional asset/liability structures 

(longer-term asset holdings funded with shorter-term 

deposits and borrowings), a flatter yield curve results in 

lower spreads between asset yields and interest costs. 

The decline in long-term interest rates during 1998 also 

led to a record volume of mortgage refinance activity, 

as indicated by the Mortgage Bankers Association’s 

Refinancing Index.20 Among many mortgage lenders, 

the most immediate impact from this refinancing activity was the revaluation of servicing assets and lower servicing fee income. Some mortgage lenders also saw a 

significant increase in overhead as they expanded staff 

to accommodate higher loan application volumes. A 

20 This index hit its peak in mid-October and has since declined in line 

with a modest upward movement in fixed mortgage rates. 

CHART 10 

65 

70 

75 

80 

85 

90 

95 

’84 ’85 ’86 ’87 ’88 ’89 ’90 ’91 ’92 ’93 ’94 ’95 ’96 ’97 ’98 

Loans and Assets Are Growing Faster than 

Deposits at Insured Institutions 

Loans to Deposits 

Deposits to Assets 

Source: Bank Call Reports and Thrift Financial Reports 

Percent 

A Flatter Yield Curve in 1998 Placed 

Pressure on Net Interest Margins 

Sources: Federal Reserve Board; Bank Call Reports; Thrift Financial Reports 

1.0 

1.5 

2.0 

2.5 

3.0 

3.5 

4.0 

4.5 

5.0 

–50 

0 

50 

100 

150 

200 

250 

300 

350 

’84 ’85 ’86 ’87 ’88 ’89 ’90 ’91 ’92 ’93 ’94 ’95 ’96 ’97 ’98 

Assets 

< $1 Billion 

(right axis) 

10-Year Less 1-Year 

Treasury (bps) 

Mean Net Interest 

Margin (%) 

Assets 

> $1 Billion 

(right axis) 

Dallas Regional Outlook 12 Second Quarter 1999 
In Focus This Quarter
 

longer-lasting impact involves the shift in borrower 

preferences toward fixed-rate mortgages. According to 

Freddie Mac, approximately 65 percent of adjustablerate mortgages refinanced in 1998 were replaced with 

30-year fixed-rate mortgages. Another 30 percent were 

refinanced into 15- and 20-year fixed-rate mortgages. 

As a result of this activity, mortgage lenders may tend 

to have a higher proportion of assets held in longer-term 

mortgage loans, leading to further margin pressures 

should interest rates rise. 

As discussed in previous sections, many insured institutions appear to be turning toward higher risk consumer 

and corporate lending strategies. Such strategic shifts 

may be at least partially in response to pressures on net 

interest margins. The search for higher yield spreads 

may also explain the continuing growth in nondeposit 

funding sources, which often take the form of complex 

obligations with embedded options that can reduce 

funding costs at the expense of additional interest rate 

risk. 

Indicators of Industry Performance
 

Market Signals for the Banking 

Industry Are Mixed 

Diminished concerns over the near-term economic outlook and reduced financial market volatility resulted in 

a sharp turnaround in investor attitudes toward banks in 

the fourth quarter of 1998. During the quarter, the SNL 

Bank Stock Index21 rose 21 percent, recovering all of 

the value it lost during the turmoil of the third quarter. 

The index has continued to rise in 1999. 

Although equity indicators have been generally positive, ratings actions in 1998 for the long-term debt of 

U.S. banks and finance companies reflect developing 

problems for certain industry segments. In sharp contrast to the previous six years, when upgrades far 

exceeded downgrades, Moody’s downgraded as many 

bank and finance company debt ratings as it upgraded 

during 1998. In the fourth quarter of 1998, Moody’s 

downgraded the long-term debt ratings of 27 bank and 

finance companies and upgraded only 15—the highest 

quarterly ratio of downgrades to upgrades since 1992. 

Downgrades during 1998 were centered in finance 

companies specializing in nonportfolio subprime lending and bank holding companies with exposure to 

emerging markets. 

Bank Performance Remains Strong but 

Earnings Variability Is Increasing 

Recent stable industry profitability in the aggregate has 

masked an increasing range of profit variability for 

individual commercial banks. Over the past six years, 

21 This index tracks the market capitalization of approximately 520 

banking companies. 

the annual aggregate return on average assets (ROA) for 

commercial banks has shown little fluctuation, ranging 

from a low of 1.15 percent in 1994 to a high of 1.24 percent in 1997.22 However, the variability in commercial 

bank profitability, as measured by the distribution of the 

industry’s ROA excluding the top and bottom 5 percent, 

has widened since 1994 (see Chart 11). For example, 

ROA for the worst 5 percent of the industry was negative 0.29 percent or less in 1998, reflecting a steady 

decline from 0.2 percent in 1995. Similarly, ROA for the 

most profitable 5 percent of commercial banks was 

above 2.16 percent, up from 1.94 percent in 1994. 

Reasons for the increasing variability of commercial 

bank ROA can be further analyzed by segregating institutions along predominant product or business lines. 

Chart 12 (next page) details the distribution of 1998 

22 FDIC Quarterly

www2.fdic.gov/qbp. 

CHART 11 

 Banking Profile, Fourth Quarter 1998, 

3.0 

’84 ’85 ’86 ’87 ’88 ’89 ’90 ’91 ’92 ’93 ’94 ’95 ’96 ’97 ’98 

Source: Bank Call Reports 

Bottom 5th Percentile 

Top 5th Percentile 

Mean 

The Range of Profitability for Commercial 

Banks Is Increasing 

Return on Asset Distribution 

–4.0 

–3.0 

–2.0 

–1.0 

0.0 

1.0 

2.0 

Dallas Regional Outlook 13 Second Quarter 1999 
In Focus This Quarter
 

CHART 12 

–5% 0% 5% 10% 15% 

1998 Performance Varies by 

Business Specialization 

Return on Assets Percentage Distribution 

Agricultural 

(2,274) 

International 

(11) 

Consumer 

(211) 

Commercial 

(3,150) 

Specialized 

(621) 

Credit Card 

(68) 

Note: Group institution count is in parentheses. 

Source: Bank Call Reports (Research Information System) 

Industry Mean ROA=1.13% 

Bottom Fifth Percentile 

Top Fifth Percentile 

ROA for six selected groups of banks segregated by line 

of business concentrations. This chart reveals that bank 

performance varies considerably by business specialty. 

For example, the distribution of ROA of credit card 

lenders23 differs significantly from that of other bank 

groups, including other consumer lenders.24 Small specialized banks25 and commercial lenders26 followed 

credit card lenders as the groups with the greatest variability in profitability in 1998. Moreover, 75 percent of 

the least profitable commercial banks were members of 

small specialized or commercial groups. New banks 

have also influenced the dispersion of bank ROA. Banks 

chartered in 1997 and 1998 make up more than 60 percent of the industry’s worst performers. However, earnings variability widened in 1998 even when newer 

institutions are excluded from the analysis. 

23 Banks with at least 50 percent of managed loans in managed credit 

card receivables and at least 50 percent of managed loans in total 

managed assets. 

24 Banks with consumer loans and single-family mortgages in excess 

of 50 percent of assets that do not meet separate credit card or mortgage lending concentration thresholds. 

25 Banks with total assets less than $1 billion, and less than 40 percent 

of assets held in loans, that do not fall in other business specialties. 

Members of this group include de novo banks and more seasoned 

banks with low loan activity, such as trust companies. 

26 Banks with 25 percent or more of assets in commercial and commercial real estate loans. 

Far fewer commercial banks posted losses in 1998 than 

during the period from 1984 to 1992. Still, the number 

of unprofitable institutions appears to be rising despite 

generally favorable economic conditions. These concerns are mitigated somewhat, since today’s worstperforming institutions are generally much better 

capitalized and are burdened with fewer problem assets 

than their counterparts during the 1980s. 

Summary 

Most indicators of U.S. economic health remain robust 

in spite of the difficulties posed by low commodity 

prices and falling exports during 1998. The consensus 

forecast of leading economic analysts calls for continued growth in the U.S. economy for the rest of 1999. At 

the same time, a number of threats to this favorable outlook exist, including the possibility of higher inflation 

and higher interest rates stemming from strong economic growth. Other scenarios involve a very different 

threat—namely, price deflation brought on by global 

overcapacity and a decline in U.S. exports. Shocks that 

might arise in the foreign sector or in the financial markets, as experienced during 1998, remain a significant 

concern during 1999. Consumer spending and business 

investment seem particularly vulnerable to such shocks 

at this stage of the expansion. 

Favorable economic conditions are reflected in the overall performance of the banking industry. Still, a number 

of indicators suggest that the risk profile of some 

insured institutions is increasing. Responding to significant competitive pressures, and perhaps emboldened 

by the long duration of the current expansion, many 

institutions are expanding their involvement in higherrisk consumer loan products, such as subprime and high 

LTV loans and higher-risk leveraged commercial loans. 

The overall shift toward higher-risk credits is occurring 

despite signs of financial strain on the part of many consumers (in the form of record personal bankruptcies) 

and businesses (in the form of declining profits and 

increasing bond default rates). Credit-related concerns 

also extend to commercial real estate, where some markets are exhibiting rapid commercial real estate development at the same time that demand indicators are 

Dallas Regional Outlook 14 Second Quarter 1999 
In Focus This Quarter
 

trending downward. Finally, sustained weak commodity 

prices are placing strains on farmers and could eventually lead to higher agricultural loan delinquencies. 

Bank and thrift net interest margins are being pressured 

by a flatter yield curve and heightened competition. 

Community institutions, which rely most heavily on 

interest income, are particularly vulnerable to tighter 

margins. The major concern in this area is that insured 

institutions will combat falling margins by entering into 

riskier funding and lending strategies. 

Market indicators and reported financial data reflect 

favorable industry performance as well as new sources 

of risk. Investor attitudes toward banking companies 

have improved since late 1998 because of an improved 

near-term economic outlook and a reduction in financial market volatility. However, a recent increase in 

ratings downgrades of bank and finance company longterm debt suggests growing concern over bank exposures to such areas as subprime lending and emerging 

markets. Despite relatively strong aggregate industry 

performance, profit variability among individual commercial banks has increased because of new chartering 

activity and pressures in consumer and commercial 

lending. As a result, for the first time since 1992, the 

worst performing 5 percent of all commercial banks 

were unprofitable last year. 

This article was prepared and coordinated by the staff of the Analysis Branch of the Division of Insurance. Contributions and feedback from analysts across the Division were essential to its completion. 

Maureen E. Sweeney, Associate Director 

Paul C. Bishop, Senior Financial Economist 

Richard A. Brown, Chief, Economic and Market Trends Section 

Steve Burton, Senior Banking Analyst 

Steven E. Cunningham, Chief, Financial Institutions Section 

Alan Deaton, Economic Analyst 

Diane Ellis, Senior Financial Analyst 

Jim Heil, Economic Analyst 

Brian Kenner, Financial Analyst 

Allen Puwalski, Senior Financial Analyst 

Dallas Regional Outlook 15 Second Quarter 1999 
Regional Perspectives
 

Dallas Regional Perspectives
 

•	 Despite sluggish fourth-quarter profits, insured institutions reported strong results for calendar year 1998. 

•	 The Region’s economy is expected to experience slower growth in 1999, but it will likely outpace the nation. 

•	 Consumer spending has been key to the Region’s growth, but growth in consumer spending may increase 

consumer credit risk. 

Banking Overview—4th Quarter Profits Fall,
 

but Calendar Year Results Still on Track
 

In general, insured institutions in the Dallas Region continued to report strong financial results and few credit 

quality problems for the fourth quarter of 1998; however, there were some signs of weakness in the quarter’s 

results. As shown in Table 1, the Region’s return on 

assets (ROA) and return on equity (ROE) for the fourth 

quarter were 1.00 percent and 11.60 percent, respectively, the lowest figures reported for both profitability measures in the past 12 quarters. Moreover, 270 banks and 

thrifts in the Region, with over $29 billion in assets, have 

converted to Subchapter S status and therefore pay no 

corporate taxes. Without these conversions, the Region’s 

ROA and ROE would have been even lower. In addition, 

the number of institutions that lost money increased 

from 170 institutions with $11 billion in combined 

assets during the fourth quarter of 1997 to 196 institutions with $36 billion in combined assets during the 

fourth quarter of 1998. 

TABLE 1 

Several factors contributed to the fourth-quarter decline 

in profitability. First, banks and thrifts in Colorado 

reported a combined ROA of only .67 percent. One institution alone reported an ROA (fourth quarter 1998, 

annualized) of negative 29 percent as a result of its 

charge-offs of subprime loans. As of December 31, 

1998, 206 banks and thrifts were headquartered in Colorado, with combined assets in excess of $37 billion. If 

the ten institutions with the worst quarterly profits were 

excluded from this group, the ROA for the remaining 

institutions would climb to 1.11 percent, more in line 

with previous quarters. Thus, a small number of banks 

are significantly influencing the decline in ROA for 

banks in Colorado. In fact, the number of banks in that 

state reporting fourth-quarter losses actually declined 

from the previous fourth quarter. The increase in the 

number of unprofitable institutions is occurring in other 

states in the Region. Factors contributing to the increase 

Fourth-Quarter Profitability Falls 

DALLAS REGION 

DALLAS REGION INSTITUTIONS NATIONAL 

INSTITUTIONS UNDER $100 MILLION TOTALS 

4Q98 4Q97 4Q96 4Q98 4Q97 4Q96 4Q98 4Q97 4Q96 

RETURN ON ASSETS 1.00 1.22 1.20 0.96 0.99 1.03 1.06 1.18 1.14 

NET INTEREST MARGIN 4.25 4.18 4.28 4.74 5.03 5.06 3.90 4.02 4.10 

RETURN ON EQUITY 11.60 14.44 14.40 9.13 9.61 10.20 12.23 13.97 13.84 

TIER 1 LEVERAGE 7.85 7.65 7.78 10.16 10.02 10.01 7.59 7.63 7.66 

% UNPROFITABLE 13.14 11.10 9.37 16.08 13.18 11.04 11.36 10.02 9.04 

CHARGE-OFF RATE 0.57 0.55 0.46 0.60 0.64 0.68 0.60 0.61 0.58 

PAST-DUE LOANS 2.37 2.36 2.60 3.14 3.08 3.23 2.17 2.27 2.45 

Source: Bank and Thrift Call Reports 

Dallas Regional Outlook 16	 Second Quarter 1999 
Regional Perspectives
 

include a growing number of newly chartered banks that 

have not reached profitability; compressed net interest 

margins at small banks; some high, nonrecurring noninterest expenses at three large banks; and significant 

loan loss expenses charged in the fourth quarter. 

A second factor that contributed somewhat to an overall 

lower ROA is the decline in the net interest margin 

(NIM) for small banks (those under $100 million in 

assets). Small banks in the Dallas Region reported an 

ROA of only .96 percent. As Table 1 shows, the NIM for 

these banks fell from 5.03 percent for the fourth quarter 

of 1997 to 4.74 percent for the fourth quarter of 1998. 

The yield on earning assets for these small banks fell by 

40 basis points from the fourth quarter of 1997 to the 

fourth quarter of 1998, while the cost of funding for 

earning assets decreased by only 11 basis points. The 

evidence suggests that even small banks are feeling the 

competitive pressures on loan rates from bank and nonbank rivals, while the rates banks pay for deposits appear 

to have bottomed out. Because smaller banks generally 

earn a greater portion of revenues from loan income than 

larger banks do, the combination of a relatively flat yield 

curve, an already low interest rate environment, and a 

competitive market are placing greater pressures on 

small banks to sustain NIMs. Sustaining NIMs could 

become increasingly difficult unless banks accept additional credit risk and commensurate yield compensation. 

Another factor contributing to the decline in ROA is the 

fact that noninterest income, as a percentage of average 

assets, decreased by 31 basis points to 1.52 percent in the 

fourth quarter of 1998. Merger activity—in particular, 

the consolidation of NationsBank of Texas with its 

North Carolina affiliate—explains the dramatic drop in 

noninterest income. If NationsBank of Texas is excluded 

from the analysis, noninterest income as a share of average assets actually rose 12 basis points. However, at 1.52 

percent, the Region’s noninterest income rate compares 

unfavorably with the nation’s 2.28 percent. 

The ROA for the calendar year was in line with the rest 

of the nation, despite the lower fourth-quarter profitability. The ROA for the Region during 1998 was 1.16 percent, the same as that reported nationwide. The NIM for 

the 12 months ending December 31, 1998, was 4.29 percent, 4 basis points higher than that reported for 1997. 

This represents the highest NIM for the Dallas Region in 

the past ten years and is considerably higher than the 

3.91 percent reported for the nation. Noninterest income 

is still low compared to that of the nation: as a percentage of earning assets, noninterest income was 1.65 percent for the Region and 2.45 percent for the nation. The 

fact that the Dallas Region is headquarters for fewer 

large regional or money center banks may explain this 

difference. Whether the fourth-quarter results are the 

beginning of a trend is too soon to tell. 

Agriculture Bank Update 

Previous Dallas Regional Outlooks have assessed the 

effects of past droughts and low commodity prices on 

the Region’s agricultural producers and farm banks. 

Despite the significant losses experienced by Texas and 

Oklahoma cotton and livestock producers, farm banks1 

in the Dallas Region continue to report financial 

strength. The ROA for farm banks of 1.03 percent during the fourth quarter of 1998 is identical to that reported for the fourth quarter of 1996, following that 

summer’s drought, and only slightly lower than the 

fourth quarter of 1997. Likewise, leverage, past-due, and 

margin statistics have not deteriorated from previous 

periods. Crop insurance and early disbursements of production flexibility contract payments have provided cash 

flow to help farmers meet short-term needs. However, 

the U.S. Department of Agriculture (USDA) expects 

grain and cotton prices to remain weak this year, which 

would place stress on agricultural producers in the 

Region, likely affecting loan quality and earnings at 

farm banks. 

Interstate Banking—What’s Behind 

the Numbers? 

The Riegel-Neal Act in 1995 allowed banks to establish 

branches across state lines. Only Texas and Montana 

chose to opt out of the law. During 1997 and 1998, 

NationsBank Corporation, headquartered in North Carolina, successfully defended itself against lawsuits 

brought by the Texas Department of Banking to keep 

the bank holding company from merging its Texas banking operations into the NationsBank North Carolina parent. On May 7, 1998, the Court decided in favor of 

NationsBank, and the prohibition against interstate 

banking effectively gave way in Texas allowing other 

banks to follow. In the Dallas Region, more than $39.5 

billion in deposits have since been consolidated at 

branches of banks headquartered in other states. 

1 Farm banks are defined as banks with more than 25 percent of total 

loans in agricultural production or agricultural real estate loans. 

Dallas Regional Outlook 17 Second Quarter 1999 
Regional Perspectives
 

Map 1 shows the percentage of deposits held by out-ofstate banks and thrifts in each of the Region’s states. For 

example, the map shows that 13.8 percent of total 

deposits in Texas are held at branches of institutions 

headquartered outside Texas. Considering that Texas 

began interstate banking just one year ago, it seems likely that this percentage will increase. To illustrate the 

potential for further consolidation, as of December 31, 

1998, 105 insured institutions headquartered in the Dallas Region had out-of-state parent holding companies. 

Combined assets for these institutions exceeded $121 

billion and represented over one-third of the assets in the 

Region. Many of these institutions are likely to be consolidated as branches of their parent entities. 

From the consumer’s perspective, there may be no difference when a financial institution becomes a branch of 

a bank or thrift located outside the state. However, since 

banks report financial data according to the location of 

their headquarters, the consolidation of banks and thrifts 

across state lines results in reported financial data being 

less meaningful on a state or regional basis. For example, when NationsBank of Texas consolidated with 

NationsBank of North Carolina, the $60 billion in assets 

originally reported in the Dallas Region and still held by 

branches in the Region are now reported as assets of 

NationsBank of North Carolina, in the Atlanta Region. 

Unless the method of reporting is modified, it will 

MAP 1 

Out-of-State Banks Hold a Large Share 

of the Region’s Deposits 

Texas 

New Mexico 

Oklahoma 

13.8% 

23.8% 

9.4% 

Percentage of 

Out-of-State Deposits 

Over 25% 

Less than 10% 

Source: FDIC Summary of Deposits as of June 30, 1998 

10% to 25% 

Colorado 

25.4% 

become increasingly difficult to report meaningful 

trends by Region. 

1999 U.S. Economic Overview 

Despite a strong fourth quarter performance in 1998, 

real U.S. gross domestic product (GDP) is expected to 

slow in 1999. After averaging nearly 4 percent in 

1997–98, most Blue Chip economic forecasters are 

calling for U.S. economic growth of between 3 and 3.5 

percent in 1999.2 With exports hurt by the strong U.S. 

dollar and recessions occurring among several key trading partners, the U.S. trade deficit will likely continue to 

be large. For the Dallas Region in particular, developments in commodity prices (e.g., agriculture, energy, 

and semiconductor chips) and in the global economy 

(e.g., Asia, Latin America, and Russia), with the turmoil 

they could bring to world financial markets, will be 

important factors in determining the health of some sectors of the economy. 

Dallas Region Overview: Slower 

but Steady Growth 

All four states in the Dallas Region have enjoyed economic expansions of longer duration and typically faster 

growth than has been the case for most of the nation. 

Most analysts believe this trend will continue in 1999, 

although the Region’s growth is likely to be slower. 

Moreover, in the absence of a general downturn in the 

overall U.S. economy, it is unlikely that the Region will 

fall prey to a recession. The Region enjoys a comparative 

advantage in costs of living and doing business, and it 

possesses a quality labor supply, both major attractions 

for relocating or expanding businesses. Its strong housing market will likely continue to benefit from low mortgage interest rates; this market, in turn, has significantly 

benefited the Regional economy by stimulating sales of 

household furnishings and appliances. 

A tight labor market, however, will be a constraint on 

employment growth in 1999. Colorado, Oklahoma, and 

Texas are at or near full employment and will consequently have a difficult time generating job growth 

above the rates of the past few years. On the plus side, 

the tight labor market should enable workers affected by 

downsizing industries to find new jobs quickly. 

2 Blue Chip Economic Forecast, March 1999. 

Dallas Regional Outlook 18 Second Quarter 1999 
Regional Perspectives
 

The crisis in Asia has resulted in deflationary pressures 

for many commodities, and the demand will likely continue to be weak for the Region’s chemicals, oil, semiconductor chips, cattle, wheat, and cotton. In addition, 

the prolonged effects of Mexico’s 1994 peso crisis, combined with oil revenue woes and a strong U.S. dollar, 

have hurt the border economy. Finally, both Brazil’s 

decision to devalue the real earlier this year and Mexico’s moderating economy will likely hurt export growth 

from the Region and put additional pressures on Latin 

American economies. Consequently, the Region’s economy is expected to experience slower growth in 1999. 

The following is a state-by-state look at the Dallas 

Region. Table 2 lists the possible risks to each of the 

Region’s four states. 

Colorado: Colorado is one of the most diversified states 

in the Region, with a large share of employment in the 

fast-growing services, trade, and communications industries and a small share of employment in the cyclical 

manufacturing industry. Colorado’s economy is closely 

tied to the national economy; most state forecasters, 

however, believe Colorado’s slowdown will not be as 

pronounced as that forecast for the United States.3 The 

state’s expanding services, construction, and trade sectors should more than offset weaknesses in its mining 

and manufacturing base. 

3 “Focus Colorado: Economic & Revenue Forecast, 1999–2004,” 

State of Colorado, Colorado Legislative Council Staff Report, March 

1999; “Colorado Economic Perspective,” Office of State Planning 

and Budgeting, First Quarter, Fiscal Year 1999. 

TABLE 2 

Colorado continues to be affected by the Asian malaise, 

particularly the ongoing recession in Japan, its number 

two trading partner. Weak oil and natural gas prices have 

resulted in continued consolidation in the energy industry, placing pressure on the state’s mining employment. 

The recent up-tick in oil prices will offer some relief to 

oil producers; however, job losses may continue to occur 

for a while longer. Construction activity is softening 

across the board in the residential, nonresidential, and 

heavy construction sectors. Particularly vulnerable in 

many counties is the secondary home market, which 

depends heavily on discretionary spending trends. The 

slowdown in economic activity may contribute to a better balance in residential and nonresidential construction 

activity, calming fears of overbuilding in some markets. 

Colorado has enjoyed strong personal income growth 

and is the only state in the Dallas Region in which per 

capita disposable personal income is above the national 

average (Chart 1, next page). High-income households 

are more likely than low-income households to invest 

heavily in the stock market, and the booming stock and 

real estate markets have resulted in increased wealth for 

many Colorado residents, contributing to a surge in retail 

sales. Many analysts believe it may be difficult for disposable personal income and stock prices in 1999 to 

keep pace with their performances of a year ago, resulting in some moderation in consumer spending. A major 

correction in the stock market could have a disproportionate effect on the state, especially on purchases of 

expensive homes and automobiles. Spending reductions 

in leisure activity could hurt the state’s vital tourism and 

recreational industries. 

Problem Areas that Could Affect Economic Growth 

in 1999 and the States that Will Be Affected 

COLORADO NEW MEXICO OKLAHOMA TEXAS 

DECREASED EXPORTS TO ASIA X X X 

DECREASED EXPORTS TO LATIN AMERICA X X 

MAJOR CORRECTION IN STOCK PRICES X X X X 

WEAK AGRICULTURE PRICES/FARM INCOME X X X 

SLOWDOWN IN HIGH-TECH INVESTMENT X X X 

TIGHT LABOR MARKETS X X X 

RAPID COMMERCIAL DEVELOPMENT X X 

WEAK OIL PRICES X X X X 

HIGHER LIVING/BUSINESS COSTS X 

Dallas Regional Outlook 19 Second Quarter 1999 
Regional Perspectives
 

CHART 1 

Only Colorado Exceeds the U.S. in Per Capita
 

Disposable Income (1997)
 

$22,787 $21,633 $20,927 

$17,661 $16,959 

$0 

$5,000 

$10,000 

$15,000 

$20,000 

$25,000 

CO US TX OK NM 

Per Capita Disposable Income 

Source: U.S. Department of Commerce, Bureau of Economic Analysis 

New Mexico: New Mexico has lagged behind the nation 

in employment growth since 1996. That could change in 

1999, although more as a result of U.S. job growth slowing down than New Mexico employment accelerating. In 

fact, New Mexico employment growth is forecast to 

grow at a moderate 1.5–2.0 percent this year.4 The fallout from weak commodity prices in oil, copper, and 

molybdenum has exacted a heavy toll on the state’s 

mining sector, and the recent rise in oil prices is unlikely to help the state’s mining sector because of weakness 

in metallic mining. Although most of New Mexico’s 

oil producers are small, in the aggregate they account 

for approximately 4 percent of its gross state product.5 

Many small producers have had to shut down production, some permanently, because prices have fallen far 

below breakeven. 

The state’s important government sector remains under 

pressure as a result of years of austere federal government budgets. Approximately one-quarter of New Mexico nonfarm employment is involved in government 

activity (the fourth-highest share in the nation), and job 

growth in this important sector was flat between December 1997 and December 1998. 

Growth in the semiconductor industry was a major factor contributing to robust economic growth in the state 

during the first half of this decade. More recently, the 

semiconductor chip industry has been under intense 

price competition from overseas, resulting in sluggish 

growth. Intel, Motorola, Philips Semiconductors, and 

4 FOR-UNM Economic Forecasting Service, December 1998. 

5 Regional Financial Associates, Inc., December 1998. 

Sumitomo Sitix cut a total of 2,000 jobs in New Mexico as Asia’s economic woes reduced demand for computer chips, cellular telephones, and other electronic 

products.6 

Relatively low costs and continued in-migration will 

likely contribute to growth in the state’s transportation, 

trade, and services sectors in 1999. The continued 

expansion of call centers and back office operations in 

the state, such as Sprint PCS and NationsBank, should 

also help pick up some of the slack in the economy. 

Oklahoma: Employment in Oklahoma has grown consistently between 2.5 percent and 3 percent for the past 

five years. An ailing oil and gas industry, however, is 

expected to cause some deceleration in Oklahoma job 

growth this year.7 Although oil and gas employment is a 

much smaller share of total nonfarm employment in 

1999 (2.2 percent) than in 1982 (9 percent), a large number of manufacturers across the state still depend heavily on the industry (e.g., producers of oil machinery, 

equipment, and pipelines). The decline in oil prices and 

working rig counts, and the reduction in exploration, 

well-servicing, and ancillary activities, will create a drag 

on economic activity in Oklahoma. Oil prices have 

rebounded in recent months, but there is a great deal of 

uncertainty concerning the level at which they will stabilize. Nonetheless, employment and production are 

likely to finish lower in 1999 than in 1998. 

Helping to offset some of this weakness in the energyrelated sectors will be a robust housing market, aggressive state and local economic development activities, 

and a growing transportation and communications sector. Oklahoma is also becoming more aggressive in 

exporting locally produced goods, such as primary and 

fabricated metals, furniture and wood products, industrial machinery, and instruments. The Asian crisis is not as 

big a problem for Oklahoma’s economy as it is for the 

Region’s other three states, because far fewer of Oklahoma’s exports are destined for the Far East. Oklahoma 

stands to benefit from continued domestic in-migration 

and foreign immigration. 

In 1998, commodity prices for corn, wheat, soybeans, 

and cotton fell to their lowest levels in decades. Last 

year’s drought decreased production while global supply 

6 “New Mexico Economy Expected to Plod through ’99,” Macario 

Juarez, Jr., Albuquerque Tribune, December 31, 1998. 7 “1999 Oklahoma Economic Outlook,” College of Business Administration, Oklahoma State University. 

Dallas Regional Outlook 20 Second Quarter 1999 
Regional Perspectives
 

and demand factors forced commodity prices downward. These circumstances have caused many producers 

to evaluate their risks more carefully in the event that 

commodity prices remain weak for another year. 

Texas: The Texas economy showed few signs of slowing 

in 1998, although there was a deceleration in job growth 

from 4.5 percent at the beginning of the year to nearly 

3 percent at year’s end. Asia’s woes and the lowest oil 

prices in ten years affected the state’s manufacturing and 

mining industries, resulting in thousands of lost jobs. 

Meanwhile, state exports rose 3 percent in 1998, their 

lowest annual growth rate so far this decade, compared 

with a decline of 1 percent for the nation. More telling, 

perhaps, is that Texas exports began declining in the second half of 1998, primarily owing to weakness in Asia 

and South America. These negative effects are likely to 

continue in 1999. Texas agriculture endured the effects 

of a severe drought and weakened Asian demand in 

1998; the latter in particular negatively affected the price 

of key commodities such as cattle, wheat, corn, and 

hogs. A consensus opinion at the USDA’s Outlook Conference projected continued weakness in farm prices and 

income during 1999. 

Despite their recent rebound, oil prices remain below 

$20 per barrel, resulting in layoffs and cutbacks in oil 

exploration budgets. Between March 1997 and March 

1998, crude oil prices fell by 38 percent, and oil and gas 

extraction employment in Texas fell by 11,700. Lower 

oil prices are affecting the Texas economy in two ways. 

First, spending plans for exploration and development, 

refining, and service companies have been dramatically 

reduced, resulting in laid-off workers. Second, lower oil 

prices mean less oil revenue for two of the state’s major 

trading partners, Mexico and Venezuela, which in turn 

can be expected to lower their demand for Texas-produced goods and services. Unlike the situation in the 

1980s, lower oil prices do not spell doom for the Texas 

economy. Economists at the Federal Reserve Bank of 

Dallas estimate that state employment growth is 75 percent less sensitive to oil price fluctuations today than it 

was in 1982.8 

Thus, there is both good news and bad news in the 1999 

Texas outlook. The bad news is that the state will face 

lingering problems in energy, foreign trade, and agriculture that will constrain growth. The good news is that 

much of the decline in these sectors appears to have 

8 Southwest Economy, Texas Update and Outlook, Federal Reserve 

Bank of Dallas, January/February 1999. 

occurred already. Although stabilizing at rather weak 

levels, these sectors are not likely to contribute to the 

further deterioration of economic growth. 

Consumer Spending Has Been Key to the 

Region’s Growth, but Growth in Spending 

May Increase Consumer Credit Risk 

Consumers will be a key factor in the performance of the 

national and Dallas Region economies in 1999, when 

both are expected to enter a period of slower economic 

growth. Consumer spending has been particularly 

important to the Region, with the tremendous gains in 

retail spending of the past decade driving the Region’s 

faster growth in gross regional product and employment 

compared with the nation. In 1999, with continued 

weakness in many foreign economies and a clouded 

export picture, consumers may once again be counted on 

to do the heavy lifting for the Dallas Region’s economy. 

Typically, consumer spending accounts for two-thirds of 

total domestic spending. Chart 2 shows the net contribution to real GDP that consumers have provided to the 

nation’s economy in each of the past three years. Personal consumption expenditures (consumer spending) contributed 64 percent, 59 percent, and 85 percent of the net 

growth in real GDP in 1996, 1997, and 1998, respectively. The contribution by consumers last year was 

especially important because the ballooning U.S. trade 

deficit subtracted more than a percentage point from 

U.S. economic growth. 

For the nation, consumer spending has achieved or 

exceeded 4 percent growth each year since 1995 and has 

CHART 2 

Consumption = personal consumption expenditures, Investment = gross private 

domestic investment, Net Exports = U.S. exports less U.S. imports, 

Government = government expenditures 

Source: U.S. Department of Commerce, Bureau of Economic Analysis

 Consumers Contributed More Than 85 Percent 

to U.S. Economic Growth in 1998 

–1.5 Consumption Investment Net Exports Government 

1997 

1998 

–1.0 

–0.5 

0.0 

0.5 

1.0 

1.5 

2.0 

2.5 

3.0 

3.5

Percentage Points at Annual Rate

1996 

Dallas Regional Outlook 21 Second Quarter 1999 
Regional Perspectives
 

averaged over 4 percent during the 1990s, propelled by 

strong gains in personal income, decreasing inflation 

rates, and low interest rates. Last year was a particularly 

strong year, with retail sales gains of more than 5 percent 

for the nation. 

Consumer spending has been very strong in the Region 

over the past decade. Three of its four states—Colorado, 

New Mexico, and Texas—had average retail sales 

growth rates above that of the nation. Retail sales growth 

in Colorado and Texas (two states that account for 85 

percent of the Region’s output) averaged more than 8 

percent annually from 1990 to 1997, almost twice that of 

the nation for the same period. 

Which Came First, Economic Growth or 

Consumer Spending? 

The tremendous growth in consumer spending in the 

Dallas Region during the 1990s has been fueled largely 

by the rapid growth in employment and income. However, other factors also have contributed. Two of these 

factors are significant changes in the household savings 

rate and changes in household debt levels relative to 

income. The household savings rate has declined dramatically during the 1990s (see Chart 3). The national 

rate of personal savings averaged between 7 and 8 percent from the 1960s through the early 1990s. Recently, 

the rate9 has been decelerating, to 2.9 percent in 1996, 

9 Personal savings rate data are collected and distributed by the Bureau 

of Economic Analysis. 

CHART 3 

The U.S. Personal Savings Rate


 Has Plummeted in the 1990s
 

Percent 

Personal Savings as a Percentage of

Disposable Personal Income 

10.0 

9.0 

8.0 

7.0 

6.0 

5.0 

4.0 

3.0 

2.0 

1.0 

0.0 

’60 ’65 ’70 ’75 ’80 ’85 ’90 ’95 ’98 

Source: U.S. Department of Commerce, Bureau of Economic Analysis 

2.1 percent in 1997, 0.5 percent in 1998, and dipping 

below zero during the fourth quarter of 1998 for the first 

time since the 1930s. 

Consumers also have been able to maintain their high 

level of spending by increasing their level of household 

debt relative to income. Since 1992, the debt-to-income 

ratio of households has climbed steadily (see Chart 4) in 

1998, it surpassed 100 percent for the first time since 

records for this indicator have been kept. 

Growing household wealth from stock market gains on 

retirement and other mutual fund holdings has increased 

consumers’ confidence and their willingness to spend 

and borrow. The Conference Board’s consumer confidence index stood at 133.9 in March 1999, inching back 

up toward the record level of 138.2 set in the summer of 

1998. Meanwhile, the S&P 500 rose more than 20 percent for the fourth year in a row in 1998. At the close of 

fourth-quarter 1998, the S&P 500 index was 350 percent 

higher than when the current economic expansion 

began. Thus, despite high household debt-to-income levels, household debt relative to net worth has been declining since 1994 (see Chart 4). 

In addition, although household debt relative to income 

is at historically high levels, the growth and level of 

household debt service burden (interest and principal 

payments relative to income) have been more modest in 

recent years. Debt service burdens have remained low, in 

part because of low interest rates and debt consolidation 

into lower-rate home equity loans. The declining interest 

rate environment and debt consolidation into home equity loans have allowed consumers to afford more debt. 

CHART 4 

16.5 

17.0 

17.5 

18.0 

18.5 

19.0 

19.5 

1990 1992 1994 1996 1998 

80 

85 

90 

95 

100 

105 

Source: Federal Reserve Board 

Although Household Debt Has Surpassed 

Disposable Personal Income, Consumers’ 

Willingness to Borrow Is Being Strengthened 

by Rapid Growth in Net Worth 

Percentage of Household 

Liabilities to Net Worth 

Household Liabilities

 to Disposable 

Personal Income 

Dallas Regional Outlook 22 Second Quarter 1999 
Regional Perspectives
 

Households appear to be borrowing (credit cards, home 

equity loans, mortgages, etc.) in part as a result of 

increased wealth from the bullish stock market. It is not 

surprising that, since 1994, household liabilities as a percentage of disposable personal income have been 

increasing, while liabilities as a percentage of net worth 

have been decreasing (see Chart 4). 

Income and employment growth, low interest rates, and 

rising household wealth have increased the economic 

well-being of consumers and have resulted in robust 

consumer spending and increased borrowing across the 

nation and especially in the Dallas Region. Although the 

strength of consumer spending has been good for the 

nation and the Dallas Region, there could be some negative aspects. Household debt relative to income is at 

historically high levels. Nonbusiness bankruptcies in the 

Dallas Region have accelerated greatly in the past four 

years. Considering that the rise in personal bankruptcies 

has taken place in otherwise very favorable economic 

conditions, a slowdown or recession would likely drive 

bankruptcy rates much higher. 

Any significant rise in interest rates would not only 

exacerbate the debt service burden but would very likely diminish the net worth of consumers through losses in 

stock and mutual fund valuations. A recession caused or 

accompanied by higher interest rates, for example, could 

result in reduced household incomes, increased debt service burdens, and diminished net worth—a potentially 

troublesome mix for borrowers and their lenders. 

Implications for Banking 

Consumer lending is an important business line for 

insured institutions in the Dallas Region. Financial institutions in the Region held $36.2 billion in consumer 

loans at December 31, 1998, representing 19.5 percent 

of all loans in the Region and significantly above the 

national average of 15.8 percent. Because the Region has 

few credit card banks and because credit card banks tend 

to be national in scope, these data suggest that the 

Region’s insured institutions’ exposure to consumer 

loans is more localized than many other parts of the 

country. In addition, banks and thrifts in the Region held 

$47.3 billion in residential mortgages (1- to 4-family) as 

of December 31, 1998, accounting for 26.4 percent of 

total loans.10 Financial institutions across the nation have 

a similar aggregate exposure to consumer lending, but 

they tend to have a higher percentage of residential mort10 Mortgage and traditional consumer loans account for almost half of 

total loans in the Dallas Region. 

gages (29.5 percent for the nation compared with 25.5 

percent for the Dallas Region). 

Another way to determine the risk of consumer debt to 

the Region is to identify institutions that have significant 

exposure or rapid growth in consumer lending. A group 

of “consumer banks” (defined earlier in this publication’s In Focus article were identified—21 financial 

institutions with $1.3 billion in assets. Although $1.3 billion is significant, it accounts for only 0.4 percent of 

total Dallas Region assets. 

A broader analysis of consumer lending in the Region 

considers institutions that reported rapid growth in consumer loan portfolios. There are 683 insured institutions 

in the Dallas Region that have grown their consumer 

loan portfolios by 25 percent or more over the past three 

years. These banks reported solid earnings, evidenced by 

an ROA of 1.28 percent for 1998, the highest rate for this 

peer group since 1993. The net interest margin has been 

consistent, ranging between 4.53 and 4.62 percent over 

the past six years. In addition, these banks and thrifts 

reported consumer loan charge-offs of only 0.88 percent 

at year-end 1998, compared with 2.39 percent for the 

nation. The charge-off rate is very low; however, these 

portfolios are growing rapidly and have a large share of 

new, unseasoned loans. The real test for credit quality 

will be when these loans become seasoned. Despite the 

high growth for these institutions, their reported capital 

levels remain relatively high, with an aggregate leverage 

ratio of 8.76 percent, slightly above the 8.53 percent 

reported as the industry average. 

Banks operating in areas where consumer bankruptcy 

rates are high, however, reported significantly different 

results. As shown in Table 3 (next page), 80 counties in 

the Dallas Region reported personal bankruptcy rates as 

high or higher than the national average of 4.72 percent 

based on December 31, 1997, data.11 There were 458 

banks in these counties, with assets of over $137 billion 

as of December 31, 1998. Of more concern are the 13 

counties in the Region that reported bankruptcy rates 

1.5 times the national average. These counties were 

headquarters for 86 banks and thrifts holding $20.5 

billion in combined assets as of year-end 1998. It is 

noteworthy that these institutions have, on a mergeradjusted basis, reduced their exposure to consumer 

lending. Consumer loans as a percentage of total loans 

have decreased from 20.8 percent at June 30, 1997, to 

11 Bureau of the Census. 

Dallas Regional Outlook 23 Second Quarter 1999 
Regional Perspectives
 

TABLE 3 

Institutions in Counties with High Bankruptcy Rates 

Hold 6 Percent of the Region’s Assets 

NATIONAL AVERAGE 4.72% 1.5 X NATIONAL AVERAGE 

INST ASSETS COUNTIES INST ASSETS COUNTIES 

(#) ($000S) (#) (#) ($000S) (#) 

CO 77 24,510,205 9 4 561,003 1 

NM 23 8,578,333 7 0 – 0 

OK 243 38,239,406 47 76 19,383,232 10 

TX 115 66,204,423 17 6 590,925 3 

REGION 458 137,532,367 80 86 20,535,160 14 

REGION (%) 31.7 41.6 18.7 5.9 6.2 3.0 

Source: Bank and Thrift Call Reports, December 31, 1998 

14.7 percent at December 31, 1998. This rapid decline 

is a consequence of the contraction in consumer loan 

portfolios at the same time total loans were growing: 

consumer loan portfolios for these banks contracted 

13.7 percent while total loans expanded 22.8 percent. 

Consumer loan charge-offs had been increasing steadily, from 0.92 percent for the quarter ending March 

1996 to 6.52 percent for the quarter ending December 

31, 1997. This trend suggests that bankers in these 

counties have recognized the distressed consumer environment and adjusted their loan portfolios accordingly. 

Dallas Region Staff 

Dallas Regional Outlook 24 Second Quarter 1999 
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