FEDERAL DEPOSIT INSURANCE CORPORATION FIRST QUARTER 1997
 

FDIC

 KANSAS CITY
 

REGION
 

DIVISION OF

INSURANCE

CRAIG A. RICE,
 

SENIOR REGIONAL
 

ANALYST
 

In Focus This Quaitei
 

• Consumers Declare Bankruptcy in Record Numbers - Despite 

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

the rise in the Kansas City Region. The increases in both personal bankruptcy filings 

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

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

• New Tax Benefits for Owners of Community Banks - The 

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

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

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

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

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

serious problems of the SAIF. See page 9. 

Regu[ai Featuies
 

+Regional Economy +Financial and +Regional Banking 

 Commodity Markets 

· Agriculture · Interest Rates · Overall Conditions 

· Non-farm Sectors · Bond Values · Credit Card Loans 

· Manufacturing · Bank Stocks · Agriculture Banks 

· Transportation · New Products · Merger Activity

· Residential Construction · Grains and Soybeans

· Commercial Real Estate 

· Industrial Sector

 See page 12 See page 17 See page 21 

A Publication of the Division of Insurance For Internal Use Only 

PROTOTYPE
 

Dear Reader, 

The prototype edition of the Regional Outlook for the Kansas City Region is attached. The Regional Outlook is produced by the Division of Insurance (DOI) and is designed to discuss events and trends affecting insured depository 

institutions in your region. This publication will be produced and distributed quarterly in our effort to share information and work with the Divisions of Supervision (DOS) and Compliance and Consumer Affairs (DCA) to identify 

emerging risks to insured depository institutions. 

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

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

relate them to insured depository institutions. 

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

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

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

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

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

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

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

Sincerely, 

Arthur J. Murton 

Director 

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

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

Rice at (816) 234-8034 or email him at Craig A. Rice@DOI@Kansas City. 

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

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

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

Ricki Helfer, Chairman, Federal Deposit Insurance Corporation 

Arthur J. Murton, Director, Division of Insurance 

Editorial Board	 George E. French, Deputy Director 

Stephen Linehan, Assistant Director, Analysis Branch 

Ronald L. Spieker, Chief, Depository Institutions Analysis Section 

Maureen E. Sweeney, Special Assistant to the Director 

Design and Production	 Steven E. Cunningham, Senior Financial Analyst 

Diane Ellis, Senior Financial Analyst 

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

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

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

this publication. 

PROTOTYPE
 
 

 

 

 

 

 

 

 

 

 

In Focus This Quarter
 

Consumers Declare Bankruptcy in Record Numbers 

Trend Raises Concerns about Consumer Credit 

• 	 Despite favorable economic conditions, personal 

bankruptcy rates are rising throughout the 

Kansas City Region. 

• 	 Kansas has the highest filing rate among the 

states in the Region with the eighteenth highest 

per capita bankruptcy rate in the country. 

• 	 Credit card charge-offs are approaching recession levels. 

Despite favorable economic conditions, the number of 

consumers that are declaring bankruptcy is on the rise in 

the Kansas City Region. The increases in both personal 

bankruptcy filings and consumer credit losses are part of 

a national trend which has the attention of industry 

participants, regulators, and Congress. Both the Senate 

and House Banking Committees have held hearings on 

the condition of consumer credit, particularly credit 

card lending. Much of the concern regarding these 

trends is due to the fact that bankruptcy filings and 

charge-offs are rising despite low unemployment and 

rising income levels. 

What Is Occurring in the Kansas City Region? 

Chart 1 shows the rising trend in consumer loan losses 

in the Kansas City Region as well as the close relationship between these losses and personal bankruptcy filings. 

CHART 1

Table 1 (next page) shows that personal bankruptcy 

rates are rising in all states throughout the Region and 

ranks the states on a national basis. Current filing rates 

are fairly moderate compared to other states in the 

country but recently have showed signs of rapid growth. 

Why Are Consumer Credit Losses Rising in an 

Expanding Economy? 

The emergence of consumer credit problems during an 

expanding economy is not unprecedented. During the 

last economic expansion, consumer delinquency and 

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

when employment rises because households are more 

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

Chart 2 shows that past cycles of rising growth in 

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

As the expansion closes out its sixth year, American 

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

payments, including mortgage, to disposable personal 

income is approaching record highs and is currently at 

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

several years of economic expansion along with credit 

card companies’ intensive efforts to generate and feed 

consumers’ appetite for credit. Consumers and their 

lenders are now experiencing the after-effects of this 

CHART 2

Personal Bankruptcies Correlate with 

Consumer Loan Charge-offs in the Region 

Filings 

(000s) 

4% 20 

3% 15 

2% 10 

1% Gross Charge-off Rates 5 

0% 0 

91 92 93 94 95 96 

Sources: Administrative Office of the United States Courts and Bank and 

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

Research and Statistics. 

U.S. Consumer Delinquency Rate Tends to 

Rise After Credit Growth Accelerates 

ABA Composite % Change in 

Delinquency Rate Consumer Loans 

30% 2.7% 

2.5% 20% 

2.3% 10% 

2.1% 

0% 1.9% 

1.7% -10% 

80 82 84 86 88 90 92 94 96 

Sources: American Bankers Association and Federal Reserve Flow of 

Funds 

Regional Outlook	 3 First Quarter 1997 

PROTOTYPE
 

 

 

 

 

 

 

In Focus This Quarter
 

credit expansion. 

Why Are Bankruptcy Rates Rising? 

Nonbusiness bankruptcy filings for 1996 will exceed 

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

is 11 percent higher than the peak in the last recession 

and a 14 percent increase over 1995 filings. A variety 

of theories have been advanced to explain this trend. 

These theories include: 

• 	 Consumers have overextended themselves. 

• 	 Recent changes in bankruptcy laws make it easier to 

shield assets from creditors. 

• 	 Changes in legal practices promote bankruptcy. 

• 	 The social and financial repercussions associated 

with bankruptcy have diminished. 

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

many of which are interrelated. 

A recent study by SMR Research Corporation attributes differences in filing rates more to state regulations than to economic conditions. The study found that 

bankruptcy is driven by the number of and exposure to 

catastrophic events. For example, in Kansas, SMR 

attributes a high filing rate to a somewhat high selfemployment business failure rate. The report identifies 

other factors driving up bankruptcy rates such as: 

• 	 high divorce rate; 

• 	 inadequate health insurance; 

TABLE 1

• 	 inadequate auto insurance; 

• 	 garnishment of wages; and, 

• 	 high debt-to-income ratios. 

All of these conditions increase consumers’ exposure to 

catastrophic events, such as job loss, that are typically 

associated with personal bankruptcy. 

Of interest to lenders is that some traditional early 

warning signs of trouble -- such as erratic missed 

payments or paying off a smaller share of outstanding 

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

finding that obligations due to them are being wiped 

out in bankruptcy court on accounts that showed no 

prior problems. 

Implications for Insured Institutions 

These trends have raised concerns about the outlook for 

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

credit card charge-offs are approaching levels not seen 

since the aftermath of the 1990-1991 recession. During 

that recession, charge-off rates increased sharply. The 

question arises whether there would be a similar sharp 

increase in credit card losses during a future recession, 

driving credit card loss rates to levels well above their 

previous peak. 

This concern is heightened by a number of factors. 

Consumer debt burdens are at historic highs. Profit 

margins for the nation’s specialty credit card lenders 

(institutions whose total loans exceed 50 percent of 

BANKRUPTCY RATES PER THOUSAND PERSONS

IOWA

KANSAS

MINNESOTA

MISSOURI

NEBRASKA

N. DAKOTA

S. DAKOTA

UNITED STATES

1990 1991 1992 1993 1994 1995 3RD QTR

1996

ANNUAL.

3RD Q 96

STATE

RANKING

1.7 2.0 2.0 1.7 1.8

3.6 3.7 3.4 2.9 3.0

3.3 3.6 3.4 2.8 2.6

2.9 3.4 3.4 2.7 2.7

2.6 2.6 2.4 2.1 2.0

1.5 1.7 1.7 1.5 1.7

1.7 1.7 1.7 1.7 1.5

3.1 3.5 3.5 3.2 3.0

2.1

3.4

2.8

3.0

2.2

1.9

1.8

3.3

2.8

4.2

3.4

3.9

3.0

2.4

2.4

4.2

39

18

28

24

35

45

46

NA

Source: Bankruptcies - Administrative Office of the United States Courts

 Population - Census Bureau 

Regional Outlook	 4 First Quarter 1997 

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In Focus This Quarter
 

managed assets and whose credit card loans exceed 50 

percent of total loans) have rapidly narrowed from a 

4.25 percent quarterly return on assets (ROA) in the 

third quarter of 1994 to a 2.02 percent quarterly ROA in 

the third quarter of this year. Competitive pressures on 

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

are few signs of any slackening of price competition. A 

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

credit card lenders, is a recent salvo in this price 

competition. Lenders also place great reliance on 

credit scoring models that have not yet been tested in 

a recession and, according to a recent Federal Reserve 

survey, appear overly optimistic in almost two-thirds of 

the banks surveyed. 

Other factors mitigate these concerns to some extent. 

Pricing of credit card loans has traditionally built in a 

margin of comfort for high and volatile losses. Loan 

portfolios are diversified with many small loans to 

individuals. There are preliminary indications that 

lenders and borrowers are retrenching to some extent. 

Consumer credit growth slowed from over 14 percent in 

both 1994 and 1995 to an annualized rate of 8 percent 

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

the Federal Reserve survey just mentioned two-thirds of 

banks reported raising the score an applicant must 

achieve to qualify for credit, and one-third reduced 

credit limits for existing customers. 

Generalizations about the outlook for credit card lending 

are difficult. Trends that describe the industry on 

average may not hold true for particular institutions. 

CHART 3

U.S.Credit Card Charge-Offs Are
 

Approaching Levels Not Seen 

Since the Last Recession
 

5.0 

4.5 

4.0 

3.5 

3.0 

2.5 

Recession 

Source: Federal Reserve Board 

Performance is likely to vary substantially, with results 

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

outlined above, credit card lending practices appear 

worthy of continued close attention by bankers and 

regulatory agencies. 

Diane Ellis, Senior Financial Analyst 

Craig A. Rice, Senior Regional Analyst 

8687888990919293949596 

Regional Outlook 5 First Quarter 1997 

PROTOTYPE
 

 

 

 

 

 

 

 

 

 

 

 

 

In Focus This Quarter
 

New Tax Benefits for Owners of Community Banks 

Subchapter “S” Benefits Now Available 

• 	 Potential benefits are substantial. A layer of 

tax expense has been eliminated. 

• 	 Eligibility is restricted and requires care to 

maintain. 

• 	 While no application to the banking agencies is 

required, the new tax structure has supervisory implications. 

• 	 The new tax structure has some potential 

drawbacks. 

Introduction 

The Small Business Job Protection Act of 1996 allows closely held banks, thrifts and holding companies to take advantage of various pass-through benefits 

of the subchapter “S” corporation tax structure. 

These benefits are potentially substantial and may 

increase the inherent value of community banks. 

Eligibility Is Restricted 

The new law allows, for the first time, financial 

institutions including banks, thrifts, and holding companies to elect subchapter “S” status if they meet 

several criteria. The most important of these reTABLE 1

quirements are that the company not use the reserve 

method of accounting for bad debts for tax purposes, 

and that it have 75 or fewer eligible shareholders. 

All shareholders must consent to the subchapter “S” 

election and the IRS must consent to any change in the 

tax accounting for bad debts. To be able to receive the 

benefits for tax year 1997, institutions therefore may 

need to act quickly since 

changes in either of the 

above areas may be time Industry observers consuming. have suggested that 

over 1,000 banks Reserve accounting for nationwide will 

bad debts for tax purposes make the is an issue affecting only subchapter “S” smaller institutions. Cur- election. rently, reserve accounting 

is allowed only for those 

thrifts and banks under 

$500 million in assets that are not part of a group with 

more than $500 million in assets. To elect the new tax 

status, the subchapter “S” company will need to make 

the accounting change to the specific charge-off 

method for tax purposes. Presumably, the IRS will not 

object to any such change, which can delay deductions 

and increase taxable income, and will allow the 

change to be effective as of the beginning of the tax 

year. 

In relation to shareholder eligibility, ownership of 

subchapter “S” corporations is limited to individuals, 

NUMBER OF BANKS WITH UNDER $100 MILLION IN TOTAL ASSETS

NATIONAL NON•MEMBER STATE

MEMBER

TOTAL

IOWA

KANSAS

MINNESOTA

MISSOURI

NORTH DAKOTA

NEBRASKA

SOUTH DAKOTA

40 318

95 250

89 322

30 285

12 94

77 199

12 62

39

16

23

32

2

14

15

397

361

434

347

108

290

89

TOTAL 355 1,530 141 2,026

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

Regional Outlook	 6 First Quarter 1997 

PROTOTYPE
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

In Focus This Quarter
 

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

shareholders, such as corporations, Employee Stock 

Ownership Plans (ESOPs) and other stock bonus 

plans, may not hold shares in subchapter “S” corporations. Once the subchapter “S” election is taken, the 

corporation and its shareholders must take care to 

continue to meet all eligibility requirements or risk 

losing the tax benefits. 

Number of Eligible Institutions 

While exact figures on the number of eligiFor bank or thrift companies that elect to convert to 

“S” corporation status, there are potentially some 

other corporate tax liabilities for unrealized gains 

accumulated through the date of conversion. As an 

example, should the fair market value of all company 

assets exceed the adjusted tax bases of these assets, 

there may be some corporate tax liability if any assets 

are later sold. Assets held on conversion date and 

sold within the next ten years require a calculation for 

“Built-in Gains Tax” (BIG tax) to determine any tax at 

the corporate level. 

ble institutions are not available, the number of small banks may provide insight 

into where the tax election may be seen. 

As Table 1 (previous page) shows, there 

are over 2,000 commercial banks in 

FDIC’s Kansas City Region with under 

$100 million in assets. It is expected that 

a large percentage of these companies 

would meet the eligibility requirements. 

Industry observers have suggested that 

over 1,000 banks nationwide will make 

There may be a rise in 

various “phantom 

bank mergers” or 

change in control 

applications as the 

companies work to 

meet shareholder 

number requirements 

or attempt to get the 

required 100 percent 

shareholder approval. 

Supervisory Implications 

While an application to bank regulators is 

not required for this tax election, there 

may be a rise in various “phantom bank 

mergers” or change-in-control applications as the companies work to meet 

shareholder number requirements or attempt to get the required 100 percent 

shareholder approval. 

the subchapter “S” election. 

Benefits to Shareholders 

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

those of a partnership. The earnings of the corporation 

generally are not taxed at the corporate level but pass 

directly to shareholders’ personal income. As such, 

cash distributions to shareholders are not subject to 

an additional layer of taxation, which results in a 

reduction in overall taxes. Shareholders remain 

liable for personal taxes on their proportionate share 

of the corporation’s taxable income. Distributions 

formerly paid directly to the IRS by the institution 

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

share of the corporate income. An interagency letter, 

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

distributions will be treated as dividends by the regulatory agencies. 

Adding value and flexibility to the “S” corporation 

structure is the ability to wholly own other “S” corporations. These rules allow holding companies and 

their bank or savings association subsidiaries to be 

“S” corporations. 

Other Tax Liabilities 

Shareholders may enter agreements that 

place limits on their ability to sell their stock. In 

addition, the mechanics of a conversion will require 

some special expertise for the bank in tax law and 

accounting. The change from the reserve method to the 

specific charge-off method for bad debts or the existence of net operating losses may present unique circumstances for each institution. 

Bank portfolios also may undergo changes prompted 

by shareholders’ requests. An example might be 

increased purchases of tax-free securities to meet the 

desires of shareholders for more tax-free interest. 

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

generates earnings. This could place a strain on 

capital in situations where growth is strong or delinquent assets are rising. 

Other Drawbacks 

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

the institution will need to meet all the eligibility 

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

related to the subchapter “S” election on the part of 

financial institutions. Specific guidelines from the 

IRS are expected by year-end 1996 which may affect 

Regional Outlook 7 First Quarter 1997 

PROTOTYPE
 

 

 

 

 

 

 

 

 

 

 

 

In Focus This Quarter
 

an institution’s decision to elect subchapter “S” status. 

The states of Connecticut, Michigan, New Hampshire, 

New Jersey, Tennessee as well as the District of 

Columbia do not recognize the federal subchapter “S” 

election. Therefore, these jurisdictions do not allow the 

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

applicable state or district taxes. 

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

other institutions. However, there are times when it may 

be difficult to maintain the subchapter “S” status. An 

example would arise when an institution needs to raise 

capital to meet Prompt Corrective Action (PCA) guidelines. To meet the IRS requirements for subchapter 

“S” election while raising the necessary capital, current shareholders may have to be the primary source 

of new capital. The ability to raise additional capital 

by attracting new eligible shareholders may be difficult 

because the total number of eligible shareholders must 

remain 75 or fewer to preserve the “S” status. Furthermore, no new classes of stock may be issued. Violation 

of any of these criteria would result in the loss of the 

subchapter “S” status and reversion to regular corporate 

tax rules. 

Distributions to shareholders are covered by similar 

restrictions for subchapter “S” corporations as for regular corporations. However, one possible new twist is 

that, in some cases, the tax liability payment for shareholders may be due before distributions are funded from 

the institution. However, this is considered similar to 

pressures brought by shareholders in other corporations 

when they require dividend payments to fund debt payments on stock loans. 

New Value for the Community Bank Charter 

Overall, this newly legislated tax break for closely-held 

financial institutions may invigorate the value of the 

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

“wrinkle” in the complexity of the examiner’s job. 

While consolidation trends can be expected to continue 

at larger companies, the new tax benefits available for 

closely-held institutions add a new incentive for the 

survival of community banks and thrifts. 

Ronald L. Spieker, Chief, 

Depository Institutions Analysis Section * 

For More Information 

Subchapter S Election for Federal Income Taxes. FIL91-96. 

* Extensive review and comments were provided by Robert F. Storch, 

Chief, Accounting Section of the Division of Supervision. 

Regional Outlook	 8 First Quarter 1997 

PROTOTYPE
 

 

 

 

 

 

 

 

 

 

 

In Focus This Quarter
 

Savings Association Insurance Fund (SAIF)

 Capitalized
 FDIC Lowers Assessment Rates 

• SAIF was capitalized through a $4.5 billion failures could quickly deplete the fund balance. 

special assessment. Almost 300 banks and Its balance was $3.9 billion, or 0.55 percent of 

thrifts in the Kansas City Region paid $293 insured deposits, on June 30, 1996, well below 

million of this total. the target reserve ratio of 1.25 percent of insured 

deposits. 

• Bank Insurance Fund (BIF) members will bear 

part of the cost of the Financing Corporation • Over 45 percent of 

(FICO) bonds beginning in 1997. SAIF assessments 

were being diverted Over 75 percent of 

• The special assessment negatively affects 1996 

operating performance, but earnings prospects 

are greatly enhanced by a proposal to lower 

future SAIF assessment rates. 

from the SAIF to pay the Kansas City 

off FICO obligations Region’s savings 

arising from the thrift institutions that 

failures of the 1980s. paid the special 

assessment posted a 

• The SAIF assessment quarterly net 

Why Was Action Needed? 

After more than two years of hard work by regulators, 

base continued to operating loss for shrink, with a 22 per- the third quarter of cent reduction noted 1996 ... from year-end 1989 to Congress, and the banking and thrift industries, the June of 1996. 

Deposit Insurance Funds Act of 1996 (Act) was 

passed to address the serious problems of the SAIF. • Disparity between SAIF and BIF premiums created strong economic incentives for institutions to The difficulties facing the SAIF were substantial and transfer SAIF-assessable deposits to affiliated demanded a solution. They primarily fell into the institutions insured by the BIF, contributing to the following areas: shrinkage in the SAIF assessment base. 

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

TABLE 1

KANSAS CITY REGION INSTITUTIONS AFFECTED BY

SAIF SPECIAL ASSESSMENT

# OF INSTITUTIONS

AFFECTED AND TOTAL

ASSESSMENT BY TYPE

SAVINGS S&L STATE NATIONAL NON•

BANKS MEMBER MEMBER

TOTAL

IOWA

KANSAS

MINNESOTA

MISSOURI

NEBRASKA

NORTH DAKOTA

SOUTH DAKOTA

27 5 6 11 34

5 17 0 14 8

10 11 0 5 4

24 28 2 8 12

8 5 1 8 6

3 0 1 2 3

4 1 3 3 3

83

44

30

74

28

9

14

TOTAL 81 67 13 51 70 282

ASSESSMENT (000S) 168,733 57,932 1,163 52,222 12,944 292,994

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

Regional Outlook 9 First Quarter 1997 

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In Focus This Quarter
 

What Significant Actions Were Taken? 

Special Assessment: In order to address the immediate 

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

65.7 basis points on SAIF-member institutions. The 

special assessment was designed to increase the fund’s 

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

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

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

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

insured by the other fund. The acquired deposits 

retain coverage under the seller’s fund.) 

The number of exempted institutions is expected to be 

small compared to the roughly 300 institutions in the 

Kansas City Region that collectively paid about $293 

million to the SAIF in November. As Table 1 (previous 

page) indicates, the special assessment affects more than 

just thrifts. This is due to the substantial number of 

banks that have acquired SAIF deposits through acquisiTABLE 2

tions or branch purchases over the last few years. 

FICO Costs: The recently enacted legislation also 

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

shore up the former Federal Savings and Loan Insurance 

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

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

SAIF had not improved as quickly as the BIF. 

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

that were already being assessed. The FICO charge on 

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

SAIF assessable deposits. As a result, the FICO 

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

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

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

necessary, FICO rates will be adjusted on a quarterly 

basis to reflect changes in the assessable deposit bases 

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

or, when the insurance funds merge, whichever occurs 

earlier, BIF and SAIF members will share the FICO 

assessment on a pro rata basis. (FICO assessments will 

be paid in addition to the deposit insurance assessments. 

See discussion below.) 

Final Rule to Lower SAIF Assessment Rates: With 

the SAIF now capitalized by the special assessment, the 

Regional Outlook 10 First Quarter 1997 

FDIC Board lowered the rates on ongoing assessments 

paid to the SAIF. The FDIC Board also widened the 

spread between the lowest and highest rates to improve 

the effectiveness of the FDIC’s risk-based premium 

system. 

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

institutions beginning January 1, 1997. (Since only 

SAIF-member savings associations must, by law, pay 

for FICO assessments until the end of 1996, a special 

interim rate was established for SAIF-member savings 

associations for the last quarter of 1996.) 

As is noted in Table 2, institutions exempted from 

paying the special assessment will not benefit initially 

from the lower SAIF assessment rates. They will pay 

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

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

payment of the special assessment in the interim. 

Implications for Insured Institutions 

Institutions that are required to pay the SAIF special 

SUMMARY OF 1997 ASSESSMENT

RATES *

1997 ADJUSTED BIF & SAIF SCHEDULE

CAPITAL SUPERVISORY SUBGROUP

GROUP A B C

1 0 3 17

2 3 10 24

3 10 24 27

EXEMPT INSTITUTION SAIF SCHEDULE

1 23 26 29

2 26 29 30

3 29 30 31

FICO ANNUAL RATES

BIF INSTITUTIONS SAIF INSTITUTIONS

1.30 6.48

* CENTS PER $100 OF DOMESTIC DEPOSITS

SOURCE: FDIC'S DIVISION OF INSURANCE

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In Focus This Quarter
 

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

As a result, many such institutions will reflect much 

lower operating earnings this year. In fact, over 75 

percent of the Kansas City Region’s savings institutions 

that paid the special assessment posted a quarterly net 

operating loss for the third quarter of 1996 primarily 

due to the special assessment. 

Concerns over the short-term financial impact described 

above are moderated by much brighter future prospects. 

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

should not affect future earnings streams of nonexempt 

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

1997. Finally, some observers have noted that the 

resolution of the SAIF’s deficiencies should remove 

uncertainties that may have depressed stock prices of 

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

capitalization of the SAIF and the change in assessment 

rates also pave the way for a dialogue about a possible 

merger of the two deposit insurance funds. 

John D. Weier, Chicago Senior Regional Analyst 

For More Information 

• SAIF Assessments. FIL-88-96 

• Accounting for the SAIF Special Assessment and 

FICO Assessments. FIL-90-96 

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

Assessments. 

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

Proposed Rules - Assessments. 

• Press Release 79-1996 and 63-1996. 

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

October 28, 1996. 

Regional Outlook 11 First Quarter 1997 

PROTOTYPE
 

 

 

 

 

 

 

 

 

 

 

Regular Features	 The Regional Economy
 

Kansas City Region:
 

Tied Together by A Common Bond
 

• 	 Despite early concerns in drought plagued areas in the Region, agriculture overall enjoyed a strong year, 

reaching record levels in net farm income. 

• 	 The 1996 Farm Bill will pass additional risks to farm producers and increase the need for risk management 

by farmers and their lenders. 

• 	 Non-farm employment growth grew at the same pace as that of the nation in 1996. 

Overview 

The Kansas City Region’s economy experienced moderate growth during 1996, to some extent mirroring the 

national economy. Nonfarm payroll employment grew 

1.9 percent in the Region versus 2 percent for the nation. 

The Region’s unemployment rate remained low at only 

3.6 percent. Despite population growth equal to that of 

the nation (0.9 percent), home building grew faster in the 

Region (11.1 percent) than in the U.S. as a whole (8 

percent). 

Agriculture 

Agriculture’s importance to the Region’s economy is 

hard to overstate -- agriculture generates a significant 

portion of the Region’s output, jobs and income (see 

Table 1). As measured by the ratio of gross farm 

receipts to total personal income, this Region has the 

five “most agricultural” states in the nation. The Region’s farm output accounts for about 20 percent of the 

nation’s total farm output. 

The Year in Agriculture - 1996 

Concerns over production and farm incomes were present as 1996 began. A persistent drought threatened the 

winter wheat crop in Kansas. The corn belt states of 

Iowa and Nebraska received excessive spring rains that 

delayed corn and soybean planting. These early concerns, coupled with already low grain stocks and robust 

foreign demand for U.S. crop exports drove grain prices 

to record levels. Higher prices for feed grains and a 

lack of grass for grazing, coupled with cyclical lows 

TABLE 1	 TABLE 2
 

THE FIVE "MOST AGRICULTURAL"

STATES IN THE NATION *

STATE RANK PERCENT

SOUTH DAKOTA

NORTH DAKOTA

NEBRASKA

IOWA

KANSAS

MINNESOTA

MISSOURI

1 27%

2 25%

3 25%

4 17%

5 17%

12 6%

19 4%

UNITED STATES ••••• 3%

* MEASURED AS A PERCENTAGE OF GROSS FARM RECEIPTS TO TOTAL

PERSONAL INCOME.

SOURCE: BUREAU OF ECONOMIC ANALYSIS U.S. DEPARTMENT OF

COMMERCE

YEAR•OVER•YEAR PERCENT CHANGE IN

FARMLAND VALUES (SEPT 30, 1996)

CROPLAND IRRIGATED GRAZING

CROPLAND LAND

IOWA

KANSAS

MISSOURI

MINNESOTA

NEBRASKA

NORTH

DAKOTA

SOUTH

DAKOTA

12.0 • •

2.4 1.7 6.7

3.8 2.6 1.8

5.9 6.8 1.7

2.1 4.5 3.6

4.8 6.7 2.5

4.2 5.1 3.8

KANSAS CITY

REGION

5.0 4.6 3.4

SOURCES: FEDERAL RESERVE BANK OF CHICAGO, FEDERAL RESERVE

BANK OF KANSAS CITY, AND FEDERAL RESERVE BANK OF MINNEAPOLIS.

Regional Outlook	 12 First Quarter 1997 

PROTOTYPE
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Regular Features The Regional Economy
 

in cattle prices, put cattlemen, particularly cow-calf 

operators, under financial stress. 

Subsequent favorable weather conditions throughout 

the Midwest resulted in the third largest corn harvest 

on record, an estimated 9.3 billion bushels. The 

soybean crop, estimated at 2.4 billion bushels, was the 

second largest on record. Iowa and Nebraska had 

near record corn and bean harvests. As a result of the 

excellent harvest, the USDA has forecast net farm 

income of $53 billion for the nation in 1996. The 

Kansas City Region shared favorably in the strong 

performance of the agricultural economy. 

Farm Real Estate Values on the Rise 

Farmland prices continued to rise across the Region. 

Table 2 (previous page) contains summary information by 

state of year-to-year percentage 

gains in various farmland categories. The states with higher 

concentrations of corn and soybeans, such as Iowa and Minnesota, enjoyed the highest gains. States with higher concentrations of wheat 

and grazing lands, such as Kansas and Missouri, show 

more modest gains. 

Since farm real estate generally accounts for nearly 75 

percent of the value of all farm assets, the rise in 

farmland prices should continue to strengthen farm 

balance sheets. The appreciation in farmland, when 

coupled with the strong farm earnings of 1996, should 

result in lower debt-to-equity ratios. This is expected 

in spite of higher anticipated loan demand. Chart 1 

illustrates the improving trend in farm debt-to-equity 

CHART 1

15% 

17% 

19% 

21% 

23% 

25% 

27% 

19801982198419861988199019921994

1996F 

Source: USDA 

Farm Sector Debt-to-Equity Ratio 

1980-1997 

1997F 

ratios. 

It is important to note that many of the states in the 

Region continue to reflect aggregate farm debt-toequity ratios that exceed the national average. 

Outlook for 1997 

The USDA’s initial estimate for 1997 farm income 

projects a decline to $40 billion. Small farms (those 

with gross sales under $250,000) are expected to have 

the largest percentage declines. The disproportionately negative effect on smaller farms is due to their 

heavier reliance on grains such as corn and wheat. As 

discussed below, the outlook for corn and wheat in 

1997 currently appears less favorable than for 1996. 

Grains: The projected decline in 1997 farm income 

is driven by expectations for lower grain prices, in 

part a result of increased foreign supplies. While corn 

receipts are expected to decline in 1997, they are still 

anticipated to exceed the 1990-1995 five-year average of $15 billion. 

The USDA estimates that the planting of U.S. winter 

wheat crop is at its lowest level since 1978 and down 

7 percent from 1996. Kansas, the U.S. leader in 

winter wheat production in most years, saw farmers 

plant 3 percent less winter wheat than in 1995. The 

decline in Kansas is largely attributed to the 1996 

drought. As it became apparent that wheat crops 

would be disappointing, farmers looked to alternatives such as cotton and grain sorghum. Late harvests 

of these crops precluded planting winter wheat last 

fall. 

Livestock: In its December 1996 Beige Book, the 

Minneapolis Federal Reserve reported that beef 

prices were believed to have 

passed their trough and should 

begin trending upward sometime 

by mid-1997. In response to last 

year’s low prices and high feed 

costs, beef cattle producers 

trimmed herds by 2 million head. The reduced supply 

of cattle should provide some support to prices in 

1997. With grain prices sharply lower, cattle feeders 

are once again turning a profit. Higher beef prices and 

lower production costs are expected to ease some of 

the pressure cattlemen were feeling last summer. 

Nonetheless, there are still concerns for many of the 

Region’s cattle producers. Severe weather in parts of 

the Region, particularly in North and South Dakota, 

Regional Outlook 13 First Quarter 1997 

PROTOTYPE
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Regular Features The Regional Economy
 

is causing stress for many cattle producers. 

Weather-related deaths are already in the thousands 

and many ranchers are running out of feed or can not 

reach their cattle. In addition, the cold weather increases feed usage. The full impact of this winter’s 

weather will not be known until the effect on calving 

operations is determined. 

Affect of the 1996 Farm Bill 

The 1996 Farm Bill perhaps represents a structural 

change for the agricultural industry. The Bill reduces 

government influence in favor of free market forces. 

Elimination of the acreage reduction program and the 

allowance of full planting flexibility will eliminate 

many of the controls on production. 

In 1997, the Farm Bill will provide direct payments to 

farmers in the amount of $7.6 billion, down from $7.8 

billion in 1996. During the period 1990 to 1995 

farmers received on average $9 billion per year in 

subsidy payments - an amount equal to 5 percent of 

farm cash income. The effects of this decrease will 

be more profound in the Kansas City Region. Each 

of the seven states in the Region rank in the top 14 

in terms of production flexibility payments received, 

based on USDA preliminary 1996 estimates (see 

Table 3). 

Since government influence on production volumes is 

supplanted by market forces, there is the potential for 

increased supply-influenced price volatility. This 

could result in significant price risk to the individual producer. This fundamental change will require 

greater emphasis on risk management techniques. The 

use of traditional techniques, such as futures contracts, 

is likely to increase, and new hedging products will be 

introduced as well. New products, such as crop yield 

insurance, futures and options, and crop revenue insurance, have been developed. Crop revenue insurance 

is a product that was widely used in areas where it 

was available in 1996. 

The key to managing risk now that government price 

supports have been eliminated is education. It will be 

increasingly important that producers recognize the 

additional risk they now carry. Lenders also will 

need to be aware of this risk, and assessing a borrower’s ability to manage risk will undoubtedly 

become a greater factor in future lending decisions. 

Non-farm Industry Sectors 

Manufacturing provides nearly 1.5 million jobs, or 

16.2 percent of nonagricultural employment, to the 

Kansas City Region. Food and kindred products are the 

Region’s largest manufacturing industry, employing over 

235,000 workers. Other leading manufacturing industries by employment are: industrial machinery and 

equipment; printing and publishing; transportation 

equipment; fabricated metals; and, electronics and other 

electrical equipment. These five industries, along with 

food and kindred products, account for 62 percent of the 

Region’s total manufacturing employment. Minnesota 

and Missouri are the Region’s industrial states -- the 

two states combined are home to 58 percent of the 

Region’s manufacturing jobs. These two states rank 

first and second in many industry categories. 

Regional Manufacturing Employment Tracks 

U.S. Business Cycle 

Chart 3 (next page) shows how closely manufacturing 

employment in the Region has tracked the U.S. industrial 

production index for manufacturing, one of many indicators used to measure the U.S. business cycle. As Chart 

3 illustrates, manufacturing employment in the Region 

tracked closely changes in U.S. industrial production 

during the late 1980s and early 1990s. Since 1991, the 

relationship has not been as close, but the two indicators 

still continued to move together. 

Manufacturing employment growth slowed in the Region 

during the final months of 1996. Contributing to the 

slowdown is the difficulty employers are having in 

hiring and retaining highly skilled technical workers. 

The seven states that make up the Kansas City Region 

already have some of the lowest unemployment rates in 

the nation. 

TABLE 3

PRODUCTION FLEXIBILITY PAYMENTS

RECEIVED IN THE KANSAS CITY REGION

STATE TOTAL

PAYMENTS

(000S)

RANK

KANSAS 422,190 2

IOWA 350,239 3

NORTH DAKOTA 307,777 5

NEBRASKA 303,270 6

MINNESOTA 261,355 8

MISSOURI 153,246 13

SOUTH DAKOTA 151,876 14

TOTAL $1,949,953

SOURCE: USDA

Regional Outlook 14 First Quarter 1997 

PROTOTYPE
 
 

 

 

 

 

 

 

 

Regular Features The Regional Economy
 

Transportation Plays Large Role in the Region 

Kansas City, St. Louis and Wichita serve as major 

thoroughfares for agricultural and manufactured goods 

shipped fromthe Midwest to other destinations around 

the nation. Transportation and manufacturing are contributing important synergies to the Region’s growing 

list of economic activities. 

For example, the number of 

air cargo loads transported 

through an airport is an important site selection criterion 

for companies looking to establish new factories and 

distribution centers. 

The Federal Express Corporation has announced 

plans to build a $10 million regional hub at Kansas 

City’s International Airport (KCI). The hub could 

double the number of delivery planes that land at KCI. 

Meanwhile, Boeing, which employs more than 15,000 

workers in Wichita, expects to add up to 4,000 jobs 

there as a result of its planned merger with McDonnell 

Douglas Corp. 

Residential Construction Activity Generally 

Robust 

Housing activity was strong throughout much of the 

Region in 1996, spurred by employment growth and 

favorable interest rates. Residential building permits 

-- an indicator of future housing activity -- were up 

10.5 percent from their 1995 level. Building permits 

for single-family homes increased 8.1 percent, while 

multifamily permits jumped 17.4 percent from the 

previous year. Overall, builders acquired 95,000 

CHART 3

-4% 

-2% 

0% 

2% 

4% 

6% 

88 89 90 91 92 93 94 95 96 

U.S. IP 

Mfg Empl 

Sources: Bureau of Labor Statistics and Federal Reserve 

Percent 

Change 

Regional Manufacturing Employment Tracks 

U.S. Industrial Production 

TABLE 4
 

OFFICE VACANCY RATES ARE LOWEST

IN THE SUBURBS

(AS OF SEPTEMBER 30, 1996)

DOWNTOWN SUBURBAN

KANSAS CITY

MINNEAPOLIS/

ST. PAUL

ST. LOUIS

UNITED STATES

16.5% 9.4%

8.8% 5.3%

17.9% 7.5%

14.4% 11.7%

SOURCE: CB COMMERCIAL/TORTON WHEATON RESEARCH

permits in 1996 for single- and multifamily dwellings. 

Commercial Real Estate Picture Mixed 

The Region’s commercial real estate markets were 

generally healthy in 1996, particularly in the suburban 

office and industrial markets of the Region’s three 

largest metropolitan areas: Kansas City, 

Minneapolis-St. Paul, and St. Louis (see Table 4). On 

the other hand, downtown office vacancy rates continued to hover around 

15 to 20 percent in Kansas City and 

St. Louis. By comparison, the U.S. 

average was 14.4 percent as of the 

end of the third quarter of 1996. 

The difference between office vacancy rates in the 

suburbs versus those found in the downtown areas are 

striking. Plaguing the downtown areas of Kansas City 

and St. Louis are high vacancy rates and low levels of 

absorption. Many companies have chosen to relocate 

their businesses to the suburbs to take advantage of 

lower building costs, better access to labor, and better 

amenities. Reinforcing this advantage that suburban 

markets enjoy have been the changes in communications technology that no longer require firms to conduct their business in a centralized location. 

Industry experts expect the supply of office space to 

continue increasing in 1997 for all three of the Region’s largest suburban office markets. Moreover, 

with suburban vacancy rates below 10 percent, rental 

rates are expected to rise over the next few years as 

well. Progress, however, will be much slower in the 

downtown office markets of Kansas City and St. 

Louis, particularly if office employment growth conRegional Outlook 15 First Quarter 1997 

PROTOTYPE
 

 

 

 

 

 

 

 

Regular Features The Regional Economy
 

tinues to slow. The exception is Minneapolis-St. 

Paul, where demand for office space in the downtown 

area appears to be strengthening, and its vacancy rate 

is already at a low level (8.8 percent). 

Industrial Sector May Have Room to Grow 

The current expansion in manufacturing has managed 

to put downward pressure on industrial vacancy rates 

in the Region. Kansas City, for example, had the third 

lowest industrial vacancy rate (2.9 percent) among the 

42 markets that CB Commercial tracks as of the third 

quarter of 1996. Similarly, Minneapolis-St. Paul and 

St. Louis both had vacancy rates of 4.1 percent as of 

the third quarter 1996 -- well below the national 

average of 7.7 percent. 

A surge in U.S. economic growth during last year’s 

fourth quarter could result in industrial vacancy rates 

moving even lower. It is too early to tell whether 

industrial construction will continue at its current pace 

in the Region during 1997. That will ultimately 

depend on the strength of the Region’s economy and 

the manufacturing industry. 

Finally, there has been some concern raised about the 

potential overbuilding of hotels in the Kansas City 

market. Industry experts warn that the market is 

becoming saturated and that the industry may slump if 

developers pursue plans to add additional hotels in 

1997. According to experts, supply growth already is 

exceeding demand growth and occupancy rates are 

beginning to fall. 

The cancellation of several large conventions may 

heighten these concerns. The Future Farmers of America Convention, the largest convention staged each year 

in Kansas City, announced that it was moving its annual 

convention to Louisville. City officials estimate that the 

economic loss from recent convention cancellations is 

more than $40 million. 

Adrian R. Sanchez, Dallas Regional Economist 

Regional Outlook 16 First Quarter 1997 

PROTOTYPE
 

 

 

 

 

 

 

 

 

 

Regular Features	 Financial and Commodity Markets
 

Financial and Commodity Markets
 

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

• 	 The Kansas City Region’s bank stock index has outperformed the S&P 500 so far this year, but it generally 

has underperformed the S&P Composite Bank Index. 

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

bank stock performance relative to the broader market. 

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

yield curve. 

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

Changes in Interest Rates and Bond Values CHART 1

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

then flattened this year. The 30-year Treasury yield 

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

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

fallen to 6.40 percent. 

To demonstrate the impact that interest rate fluctuations 

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

income portfolio, Table 1 presents three types of fixed 

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

callable FNMA Agency bond. The value of each bond 

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

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

each bond between those dates. 

Together the bonds lost nearly 5.27 percent of their 

value through July 1, 1996, but they recovered 2.74 

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

was down 2.68 percent. On an aggregate basis, the 

TABLE 1

Kansas City Region’s banks fared slightly better. The 

value of securities holdings for all Call Report filers in 

the Region declined by only 1.41 percent for the nine 

months ending in September. Obviously each institution’s investment portfolio performance will vary depending on the types of instruments held and the original 

The Treasury Yield Curve in 1996 

5.0 

5.5 

6.0 

6.5 

7.0 

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

11/25/96 

1/1/96 

7/1/96 

Source: Bloomberg 

Percent 

. 

EXAMPLE OF RECENT BOND PERFORMANCE

US TREASURY

30-YEAR BOND

$100,000 PAR

7.25% COUPON

7.75 YRS UNTIL MATURITY

FNMA

MORTGAGE PASS-THROUGH

$100,000 PAR

7.5% COUPON

7.59 YRS WAL

FNMA

CALLABLE AGENCY BOND

$100,000 PAR

7.55% COUPON

7.58 YRS UNTIL MATURITY TOTAL

DATE

11/25/96

7/1/96

1/1/96

SOURCE: Bloomberg 

PRICE

$107,375

$103,406

$111,281

CHANGE FROM

PRIOR PERIOD

3.84%

(7.08%)

PRICE

$100,280

$98,130

$102,110

CHANGE FROM

PRIOR PERIOD

2.19%

(3.90%)

PRICE

$102,240

$100,100

$105,020

CHANGE FROM

PRIOR PERIOD

2.14%

(4.68%)

PRICE

$309,895

$301,636

$318,411

CHANGE FROM

PRIOR PERIOD

2.74%

(5.27%)

Regional Outlook	 17 First Quarter 1997 

PROTOTYPE
 

 

 

 

 

 

 

 

 

 

 

 

 

Regular Features Financial and Commodity Markets
 

acquisition price of each instrument. 

The Kansas City Region’s Bank Stock Performance 

The stock market generally reacts 

unfavorably to rising interest rates, 

and reflecting this, the S&P 500 

gained only slightly more than 3 

percent through July (the latest peak 

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

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

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

performed well for most of the year, despite the 

period of rising rates that occurred during the first two 

quarters of 1996. 

The stellar performance of the money center banks this 

year -- with Citicorp and Chase Manhattan alone up 

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

Index to outperform indexes that track the performance 

of the Kansas City Region’s banks. The Kansas City 

Regional Bank Index (KCRBI), created by the Division of Insurance (DOI), consists of the Kansas City 

Region’s 13 members of the American Banker Bank 

Index, which includes the 225 largest publicly-traded 

banks or bank holding companies. The KCRBI, which 

is weighted by total market value of shares outstanding, has gained 33 percent on the year, with performance closely tracking the S&P Bank Index (see 

Chart 2). The KCRBI shares its two largest institutions with the S&P Bank Index: First Bank System, 

Inc. and Norwest. 

CHART 2
 

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

A recent study by Merrill Lynch suggests that the slope 

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

of near-term bank stock performance relative to the 

broader market. For the period 1950 through 1995, the 

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

percent of the time in the twelve months following a 

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

Treasuries. In contrast, the median underperformed the 

broader market 75 percent of the time in the twelve 

months following compression in the 5-year and 3-

month spread. Chart 3 (next page) plots this concept 

through 1995. 

The results of this study are intuitive. A steepening 

yield curve favors widening interest margins. The 

opposite is true as the yield curve flattens. 

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

previous year portend the recent strength in bank 

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

October 1996, bank stock performance relative to the 

broader market was strong despite a decline of nearly 

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

preceding twelve months. 

This recent departure from the historical pattern may 

have resulted from the market’s recognition of 

widespread cost-cutting and “right-sizing” programs, as 

well as merger and acquisition activity. Also, bank 

stock performance has been buoyed by the use of excess 

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

A New Product for Managing Exposures to Yield 

The Kansas City Region's Banks Outperform the S&P 500 

but not the S&P Bank Index 

-10% 

0% 

10% 

20% 

30% 

40% 

50% 

5-Jan

26-Jan

16-Feb

8-Mar

29-Mar

19-Apr

10-May31-May

21-Jun

12-Jul

2-Aug

23-Aug13-Sep

4-Oct

25-Oct

15-Nov

6-Dec 

Change from 1/01/96 

S&P Bank Index 

S&P 500 

Kansas City Regional Bank Index 

Sourc es: Bloom ber g, Am erican Bank er 

Regional Outlook 18 First Quarter 1997 

PROTOTYPE
 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Regular Features Financial and Commodity Markets
 

Curve Twists 

Managing earnings exposures to changes in the yield 

curve typically requires altering cash 

market positions, executing customized 

financial derivatives, or contracting 

multiple positions in exchange-traded 

derivatives instruments. Recently, the 

Chicago Board of Trade (CBOT) introduced new 

products that may eventually simplify managing this 

risk -- Yield Curve Spread Futures and Futures 

Options (YCSF). 

YCSF contracts are structured so the payoff changes 

only in response to changes in spreads between points 

along the Treasury yield curve, rather than shifts in the 

overall level of interest rates. These instruments may 

provide advantages over hedges involving multiple 

positions in interest rate derivatives that attempt to 

isolate spreads along the yield curve. Ten futures 

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

and 30-year maturity points were initially approved 

for trading. Options on these contracts also are 

traded. 

In theory, YCSFs could be used to construct hedges 

for specific interest-sensitive securities, or more 

macro hedges based on an institution’s overall balance sheet structure. Regardless of how they are used, 

a great degree of sophistication would likely be 

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

supervisory policy addressing financial derivatives. 

Initial trading in the YCSFs has been thin and for some 

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

fied with most volume being derived from speculators 

and traders for proprietary accounts. 

Favorable Forecasts, Fewer Exports Drive 

Grain Prices Lower 

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

corn and soybean crops this year. Favorable weather 

during the late harvest pushed estimated corn production for the 

1996/1997 crop year to 9.27 billion 

bushels -- the third best harvest behind 

those of 1992 and 1994. The USDA 

expects strong corn yields over much 

of the Corn Belt and record yields in 

Nebraska, Kansas, and Missouri. Likewise, soybean production is forecast to total 2.4 billion bushels 

-- second only to the 1994 harvest. 

As expected, prices for corn continued to slide from 

their summer highs, which were driven by fears of 

supply shortages, late planting, and late harvest risks. 

Weaker corn and soybean prices, the second largest 

spring wheat harvest on record, and favorable weather 

conditions for the recently planted winter wheat crop 

also have softened wheat prices (see Chart 4 next 

page). Further compounding price declines has been 

a drop in demand from abroad as global competition 

heightens. Domestic corn and wheat producers are 

facing increased production, aggressive marketing, 

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

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

Twists in the Yield Curve Closely Correlate with 

Subsequent-Year Relative Bank Stock Performance 

-300 

-200 

-100 

0 

100 

200 

300 

196019661972197819841990 

5-year, 3-month Spread 

(bp) 

0 

40 

80 

120 

160 

Relative Bank Stock 

Performance 

(1953=100) 

--- Yield Curve Spread 

Sources: Merrill Lynch, Federal Reserve Board

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

Regional Outlook 19 First Quarter 1997 

PROTOTYPE
 

 

 

 

 

Regular Features Financial and Commodity Markets
 

CHART 4 TABLE 2
 

Prices R eceived by Farm ers 

Septem ber 1993 - O ctober 1996 

$0 

$1 

$2 

$3 

$4 

$5 

$6 

$7 

$8 

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

Per Bushel 

W heat Corn 

Soybeans 

Source : USDA

 A ORCOMMODITY RAN ING 

BA EDON1 4 CA HRECEIPT 

IA KS MN MO NE ND SD

CATTLE

CORN

SOYBEAN

HOGS

WHEAT

DAIRY

SORGHUMGRAIN

BARLEY

SUNFLOWERS

SUGAR BEETS

4

1

3

2

5

1

3

4

2

5

4

3

2

5

1

1

4

2

3

5

1

2

4

3

5

2

1

3

4

5

1

2

3

5

4

SOURCE: USDA

According to the USDA, average prices for all three 

crops for the current marketing year are expected to fall 

from the average of the previous year, but should remain 

favorable relative to the average price received over the 

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

that mature over the 1996/1997 marketing year recently 

trading approximately 30 percent below their respective 

contract highs reached earlier in the year. 

Provided livestock and milk prices continue their recent 

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

This is especially good news for cattle operators who 

faced falling cattle prices and rising feed costs earlier in 

1996. Table 2 shows the major agricultural commodities for states in the Kansas City Region. 

The prospect for timely repayment of production loans 

to the Region’s agriculture banks appears good based on 

the current expectations for operating income. Cash 

flows for many crop producers also should be supported 

by the first of seven fixed-support payments under the 

1996 Farm Bill.

 Allen Puwalski, Banking Analyst

 Steven E. Cunningham, Senior Financial Analyst

Regional Outlook 20 First Quarter 1997 

PROTOTYPE
 

 

 

 

 

 

 

 

 

 

 

 

Regular Features	 Regional Banking
 

Current Regional Banking Conditions
 

• 	 Institutions in the Kansas City Region in the aggregate are profitable, well capitalized, and have strong 

asset quality. 

• 	 Loan charge-offs are rising and now exceed the national average. The increase primarily is attributed 

to increased losses in consumer debt, which is most dramatic in the credit card portfolio. 

• 	 Agriculture lending, the mainstay for a majority of the Region’s banks, continues to be profitable. 

• 	 Mergers continue the shift of deposits from small banks to medium and large institutions. 

Favorable economic conditions have assisted in maintaining the financial health of the Kansas City Region’s 

banks and thrifts. Both balance sheets and examination 

ratings portray a strong industry. Nevertheless, there 

are some areas of special interest this quarter. 

Earnings in the third quarter of 1996, though healthy on 

an aggregate basis (year-to-date 1.4 percent return on 

assets (ROA) versus 1.2 percent nationally) have been 

substantially reduced at some institutions. For example, 

the effect of the SAIF special assessment was especially 

noticeable in North Dakota, where the aggregate ROA 

dropped to 0.70 percent, primarily due to this one-time 

event (see SAIF Capitalized). In addition, South 

Dakota’s large credit card banks are showing the effects 

of deterioration in consumer loan quality. 

Consumer credit, especially credit card lending, remains an area of potential concern as discussed below. 

Credit Card Delinquencies in the Region are on 

the Rise 

Loan charge-offs in the Kansas City Region increased to 

0.66 percent of total loans as of September 30, 1996, up 

from 0.49 percent at year-end 1995. The increase was 

driven, in large part, by charge-offs in credit card 

portfolios. The charge-off rate for credit card loans in 

the Kansas City Region was 5.24 percent during the 

third quarter, higher than the national average of 4.31 

percent and significantly higher than the 3.75 percent 

and 3.57 percent reported for year-end 1995 and yearend 1994, respectively. Credit card delinquencies also 

increased from 4.3 percent at year-end 1995 to 4.89 

percent as of September 30, 1996. 

Geographically, most credit card activity in the Region 

is concentrated in affiliates of larger banking organizations and financial service companies in the Sioux Falls 

field office. Collectively, banks in that field office hold 

about 64 percent of the Region’s credit card outstandings and, not surprisingly, reflect the highest charge-off 

rates in the Region. 

On a regionwide basis, the largest banks (assets exceeding $10 billion) hold about 58 percent of the Region’s 

credit card receivables. However, it is medium sized 

banks, those with assets of $1 billion to $10 billion, 

that showed the most deterioration in their portfolios. 

In the aggregate, this group of banks, which controls 28 

percent of Region’s credit card outstandings, charged 

off 5.46 percent of credit card loans during the past 12 

months. 

Given all of the recent publicity over consumer debt 

levels and the negative performance trends of the ReCHART 1

0.0 

0.5 

1.0 

1.5 

2.0 

2.5 

3.0 

3.5 

IA KS MN MO ND NE SD 

Bank and Thift ROAAs Are Strong But Have 

Been Affected in Some Areas by Consumer 

Loan Losses and SAIF Special Assessment 

Dec 94 Dec 95 

Soruce: Bank and Thrift Call Reports 

YTD 1996 

Annualized 

Regional Outlook	 21 First Quarter 1997 

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Regular Features Regional Banking
 

CHART �
 

Field Offices with Significant Consumer Debt Show Elevated Charge-off Activity 

Percent of Loans Past Due, on 

Nonaccural, or Restructured at 9-30-96 

4.0% 

Percent of Total 

Loans Charged-off 

3.0% 

2.0% 

1.0% 

0.0% 

CED CMO CRE 

Source: Bank Call Reports 

FAR GRF GRI HAY MAN MIN OMA OPE OPW ROC SIC SIF SMO URB WIC 

in Last 12 months 

gion’s consumer loan portfolios (see Consumers Declare Bankruptcy in Record Number), credit card 

portfolios warrant continued close attention by bank 

management and regulators. In that regard, the OCC 

issued additional guidance to banks during the third 

quarter, focusing on maintaining prudent underwriting 

standards and controls. Suggestions such as these may 

already be having some effect, as Moody’s recently 

reported that the rate of growth in credit card losses 

has declined for three consecutive months. 

A Profitable Year for Farmers Contributed to 

the Good Performance for Insured Institutions 

The health of the agriculture industry significantly 

influences the performance of a majority of the Kansas 

City Region’s commercial 

banks. Fifty-eight percent of 

the Region’s banks have 25 

percent or more of their loan 

portfolio in agriculture-related 

operating and real estate loans. 

In general, 1996 was a good year for agricultural 

producers, and examiners indicate that most farm 

borrowers continue to enjoy relatively strong financial 

condition. Nevertheless, some wheat farmers and 

cattle ranchers are suffering. A drought that extended 

into parts of Kansas resulted in poor winter wheat 

yields for the second year in a row. In addition, cattle 

ranchers suffered throughout the Region from high feed 

costs and low prices. These conditions likely influenced recent surveys conducted by both the Minneapolis and Kansas City Federal Reserve banks. They 

reported that forced liquidations are increasing for 

cattle ranchers in Nebraska, North Dakota and South 

Dakota. 

This suggests that some insured institutions in these 

areas could experience declining credit quality and 

reduced earnings, especially if conditions do not improve in 1997. 

Another area of interest for the Region’s farm banks 

involves hedge-to-arrive contracts. Recently, the Commodities Futures Trading Commission lodged complaints against three firms that have marketed the contracts. If the contracts in dispute are deemed illegal, the 

immediate losers will be the elevators and cooperatives 

and potentially their lenders. On a positive note, an 

informal survey of examiners did not uncover any insured institutions holding affected cooperative or elevator debt. 

Unfortunately, there is still uncertainty over how the 

cooperatives owners -- who are mostly farmers -- may 

be affected. For example, in the case of the Grain Land 

Cooperatives of Blue Earth, Minnesota a few farmer 

members (150 of 3,000) have banded together to challenge the contracts. Should they win, the $28 million in 

dispute will more than eliminate the capital of the 

cooperative. The consequences would include wiping 

out the equity of the other 2,850 members, which for 

many was earned over a lifetime of farming. The 

financial effect on most farmer and owners is uncertain 

and, therefore its effect upon their repayment ability can 

not be estimated at this time. 

Merger activity heats up 

The number of insured commercial banks in the Region 

has declined by 480 in the last five years, but total assets 

in the remaining banks have increased by $60 billion. 

Regional Outlook 22 First Quarter 1997 

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Regular Features Regional Banking
 

This consolidation trend continued with significant 

merger activity in 1996. Homeland Bankshares, Mark 

Twain, Boatmens, First Tier, Roosevelt Bank, and 

Bank IV, to name a few, were all acquired. Nationsbank, with the purchase of Boatmens, became the largest 

bank in Missouri and Kansas only to be subsequently 

passed by Mercantile’s acquisition of Roosevelt Bank. 

Very few of the remaining large banks within the Region 

are immune to takeover, according to industry analysts. 

The effects of mergers and acquisitions are apparent in 

a shift in deposits from institutions having less than $500 

million in total assets to institutions with assets exceeding $500 million. For the quarter ending September 30, 

1996, banks with total assets of less than $500 million 

experienced annualized asset shrinkage of 0.93 percent. 

At the same time, banks with total assets exceeding $500 

million had an annualized growth rate of nearly 20 

percent. Despite the shift toward larger banks, deposits 

in banks with total assets of less than $500 million still 

account for 55 percent of the total deposits in the 

Region. 

Craig A. Rice, Senior Regional Analyst 

Regional Outlook 23 First Quarter 1997 

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