Regional Outlook
 

FEDERAL DEPOSIT INSURANCE CORPORATION FIRST QUARTER 2000 

FDIC
 

Atlanta
 

Region
 

Division of
 

Insurance
 

Jack M.W. Phelps,
 

Regional Manager
 

Scott C. Hughes,
 

Regional Economist
 

Pamela R. Stallings,
 

Senior Financial
 

Analyst
 

In Focus This Quarter 

◆ Recent Trends Raise Concerns about the Future of Business Credit 

Quality—Commercial and industrial (C&I) lending is one of the largest and 

fastest-growing lending lines at insured institutions. Recent growth in C&I lending 

can be attributed to a strong U.S. economy, increased industrial merger activity, and 

a willingness of lenders to extend credit. While C&I credit quality remains relatively strong, signs of deterioration have recently begun appearing in C&I portfolios 

and in corporate bond defaults. These signs of weakness in commercial credit quality raise concerns because they are appearing during a period of economic strength. 

Business credit quality could deteriorate further in the event of an economic slowdown, higher interest rates, or a loosening of underwriting practices. See page 3. 

By Arlinda Sothoron, Alan Deaton 

◆ Local Industries in the Global Economy—The contribution of international trade to overall U.S. economic activity has been increasing for a number of 

years. Although the United States trades with many nations, most activity is concentrated in a few markets—Canada, Japan, and Mexico. Across a collection of 

industries, there is, however, considerable variation in both the level of exposure to 

export markets and the intensity of import competition.A number of industries are 

highly exposed to international markets, suggesting that economic conditions 

abroad are particularly important in any assessment of future revenue growth or 

profitability. See page 11. 

By Paul C. Bishop 

Regional Perspectives 

◆ The Atlanta Region’s Economy Remains Strong as the Nation’s 

Expansion Approaches Record Length—However, development of new 

industries can result in new challenges for local economies. These challenges exist 

side by side with perennial threats to areas dependent on more traditional types of 

industry, such as coal mining and apparel manufacturing. See page 18. 

◆ Several Factors, Such as Supply and Demand Forces, May Have 

Coalesced to Foster a Suitable Environment for De Novo Banking 

Activity—Population increases may boost market demand for financial services, 

and supply-side forces, such as displaced management and available capital, work 

together to encourage the chartering of new banks. See page 21. 

◆ De Novo Banks Traditionally Experience Higher Levels of Risk and 

Are More Susceptible to Economic Downturns than Established 

Banks—The number of de novo banks in the Atlanta Region has risen substantially since 1993. It is likely that the crucial period in the life cycle of a de novo bank, 

as it matures into an established bank, extends beyond the first three years of operation. Recognizing this vulnerability, management of new banks should be aware of 

the greater risks that are innate in the early life cycle of a de novo bank and how 

changes in the economy could affect these institutions. See page 23. 

By the Atlanta 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 as an information source on banking and economic issues for insured 

financial institutions and financial institution regulators. It is produced 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, AS, AZ, CA, 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. 

For more information or to provide comments or suggestions about the Atlanta Region’s Regional 

Outlook, please call Jack Phelps at (404) 817-2590 or send an e-mail to jphelps@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 

Writer/Editor Kim E. Lowry 

Editors Lynn A. Nejezchleb 

Maureen E. Sweeney 

Richard A. Brown 

Steven E. Cunningham 

Ronald L. Spieker 

Publications Manager Teresa J. Franks 
In Focus This Quarter
 

Recent Trends Raise Concerns about the Future of
 

Business Credit Quality
 

•	 C&I loan portfolios have been growing rapidly 

during this economic expansion. 

•	 Indicators of weakening corporate credit quality 

have begun to appear, including higher C&I loan 

losses and rising corporate bond defaults. 

•	 The future of business credit quality will depend 

on the economy and on underwriting practices. 

Commercial and industrial (C&I) lending is one of the 

largest and fastest-growing segments of lending at 

insured institutions. As of the third quarter of 1999, 

C&I loans comprised 24 percent of total loans and 

leases held by FDIC-insured institutions, up from 21 

percent at the end of 1995. C&I loan portfolios have 

grown primarily because of strong loan demand driven 

by a long economic expansion during which the indebtedness on corporate balance sheets has expanded rapidly. Even as the economic expansion continues, C&I loan 

charge-offs have begun to trend upward, albeit from historically low levels. By some measures, banks and the 

financial markets appear to be assuming increased levels of risk that could lead to greater C&I loan losses 

when the economy eventually weakens. 

High rates of growth in commercial lending and weakening indicators of C&I credit quality raise concerns 

about the future of credit quality at insured institutions. 

This article examines the factors that have contributed 

to high C&I loan growth rates and discusses the drivers 

that will determine the direction of C&I credit quality in 

the future. While loan performance at insured institutions is relatively good at the present time, signs of deterioration and stress have begun to appear despite the 

continued strength of the domestic economy. The future 

of C&I credit quality will ultimately be determined by 

trends in underwriting and corporate debt levels, along 

with the performance of the U.S. economy. 

C&I Loan Growth Has Accelerated 

C&I loans held by FDIC-insured banks and thrifts grew 

by almost 9 percent during the 12 months ending in 

September 1999, down somewhat from a 13.4 percent 

rate of growth in 1998 (see Chart 1). By contrast, total 

CHART 1 

Commercial and Industrial (C&I) 

Loans Are Growing at a Faster Rate 

than Total Loans and Leases 

Loan Growth 

Rate (%) C&I Loans 

15 

10 

5 

0 

–5 

–10 

Note: 1999 data are annualized based on 3Q99 data. 

Source: FDIC Research Information System 

Total Loans 

and Leases 

’86 ’88 ’90 ’92 ’94 ’96 ’98 

loans and leases at insured institutions grew by only 7 

percent in the 12 months ending in September 1999. 

C&I loans accounted for approximately 29 percent of 

all net new loans booked during the 12 months ending 

in September 1999, while unfunded C&I loan commitments grew by approximately 17 percent to $1.6 trillion. 

Syndicated lending played a major role in C&I loan 

growth during the 1990s. As intense competition and a 

narrowing of financial institutions’ net interest margins 

have encouraged lenders to seek additional sources of 

revenue, larger institutions have become increasingly 

active as loan syndicators and as purchasers of syndicated credits. Syndicated loan volume reached its peak 

in 1997, when originations totaled some $1.1 trillion 

(see Chart 2, next page).1 After falling off in 1998, originations of syndicated loans rose by 17 percent in 1999 

to just over $1.0 trillion. Leveraged loans, in which the 

borrower’s debt-to-equity ratio is significantly higher 

than the industry average, served as a catalyst for syndicated lending growth in 1999, accounting for 32 percent of total syndicated loan originations. Leveraged 

lending is very attractive to lending institutions because 

of the generous fee income associated with leveraged 

originations. Leveraged loan originations grew to $320 

billion in 1999, partly because of the continued rapid 

pace of corporate mergers in 1999.2 

1 LPC Gold Sheets, Vol. XIV, No. 1. Loan Pricing Corporation.
 

January 10, 2000.
 

2 According to Houlihan Lokey’s Mergerstat, total M&A activity set
 

a new record of $1.4 trillion in merger deal value in 1999.
 

Atlanta Regional Outlook 3	 First Quarter 2000 
In Focus This Quarter
 

Most of the C&I loan growth among insured institutions 

since 1997 has been concentrated in loans to domestic 

borrowers. C&I loans held in foreign offices declined 

following the Asian economic crisis and the Russian 

government bond default in 1997 and 1998, respectively, while domestic C&I lending was growing at doubledigit rates. During the 12 months ending in September 

1999, C&I loans held in domestic offices grew 12.2 

percent while C&I loans held in foreign offices 

declined by almost 6 percent. 

Is This Rapid Loan Growth a Cause 

for Concern? 

The effect of rapid loan growth on subsequent credit 

quality has been the subject of a number of articles. A 

recent study by the Federal Reserve Bank of Kansas 

City found that high rates of loan growth in the early 

1980s and early 1990s appeared to be positively correlated with future higher loss rates.3 The study also noted, 

however, that relatively high loan growth rates in the 

late 1980s did not result in sharply higher loss rates. 

Another study by the Federal Deposit Insurance Corporation found that banks that failed during the banking 

crisis of the 1980s were generally more likely to have 

grown their loan portfolios aggressively than banks that 

did not fail.4 But it remains to be seen whether the high 

C&I loan growth rates of today will necessarily contribute to higher losses for insured institutions in the 

future. The future course of industry loan losses 

depends on many factors, including the condition of the 

economy, the interest rate environment, and underwriting standards used in originating C&I credits. 

The Condition of the Economy 

Is an Important Driver of C&I Loan Growth 

Recent economic conditions have been particularly 

conducive to rapid growth in domestic C&I lending. 

Business investment has expanded at double-digit 

annual rates as firms have invested in new technologies 

to raise productivity and keep costs down. These productivity gains have been instrumental in allowing the 

3 William R. Keeton. “Does Faster Loan Growth Lead to Higher Loan
 

Losses?” Economic Review. Federal Reserve Bank of Kansas City.
 

Second quarter 1999. 


4 Federal Deposit Insurance Corporation, Division of Research and
 

Statistics. History of the Eighties: Lessons for the Future. Vol. 1, An
 

Examination of the Banking Crises of the 1980s and Early 1990s.
 

1997. http://www.fdic.gov/bank/historical/history/contents.html.
 

CHART 2 

Syndicated Loan Originations Rebounded 

in 1999 after Falling from Record Levels 

Source: Loan Pricing Corporation 

Syndicated Loan Originations

 ($ Billions) 

0 

200 

400 

600 

800 

1,000 

1,200 

’95 ’96 ’97 ’98 ’99 

economy to grow at a relatively rapid pace with low 

inflation. Strong growth in real wages has helped boost 

the consumer confidence index to an all-time high of 

144 in January 2000. Robust consumer demand for 

goods and services has kept business profits growing, 

further spurring business borrowing to finance inventories, new construction, and fixed assets such as computer networks. Amid all of these favorable trends, C&I 

loan charge-off rates have remained at record lows of 

less than 0.5 percent since 1994. Recently, however, 

despite a continuation of generally favorable conditions 

in the economy and the financial markets, signs of credit quality deterioration have begun to appear in C&I 

loan portfolios. 

Evidence from Financial Institutions Points 

to a Weakening in Business Credit Quality 

Despite strong business conditions and generally good 

asset quality, signs of deterioration in C&I credit quality have begun to appear in bank portfolios. While problem C&I loan levels remain low by historical standards, 

net C&I loan charge-offs during the 12 months ending 

in September 1999 were 63 percent higher than during 

the previous 12-month period. The net C&I loan chargeoff rate rose in the 12 months ending in September 1999 

to 0.5 percent, up from 0.3 percent one year earlier. 

Similarly, noncurrent C&I loans as of September 1999 

rose to $11.2 billion, or 1.2 percent of total C&I loans.5 

In dollar terms, this level of noncurrent loans is 30 percent higher than one year earlier. 

5 Noncurrent C&I loans include C&I loans past-due over 90 days and 

all C&I loans in nonaccrual status. 

Atlanta Regional Outlook 4 First Quarter 2000 
In Focus This Quarter
 

Despite these increases in C&I charge-offs and noncurrent C&I loans, the current industry ratios for these measures remain well below the 1.9 percent and 4.5 percent 

ratios reported during the recession in 1991 for net C&I 

charge-offs and noncurrent C&I loans, respectively. 

Interagency Loan Review Reveals Increases 

in Problem Credits from Previously Low Levels 

The results of the 1999 Shared National Credit (SNC) 

review provide another indication of slipping credit 

quality at large commercial banks.6 According to the 

Federal Reserve Board of Governors, adversely classified syndicated loans rose to $37.4 billion in the 1999 

review, a level approximately 70 percent higher than that 

reported in 1998. This figure represents 2 percent of the 

$1.8 trillion in drawn and undrawn loan commitments 

reviewed in 1999. By contrast, adversely classified 

assets identified in the 1998 SNC review totaled only 

$22 billion, or 1.3 percent of loans reviewed in 1998.7 

While the level of adversely classified syndicated loans 

remains low, 14 percent of the loans adversely classified 

during the 1999 review were loans made to new borrowers since the 1998 SNC review. In reference to this 

finding, Office of the Comptroller of the Currency 

(OCC) First Senior Deputy Comptroller and Chief 

Counsel Julie Williams has noted that “Banks are booking new loans that are weak at their inception.”8 The 

high rate of adversely classified new loans could be 

attributable to the continued effects of loan originations 

made toward the end of a period of loosened underwriting standards in 1997 and early 1998. Alternatively, it 

could indicate a higher-risk credit mix in current C&I 

loan portfolios. 

Signs of corporate stress that may weaken credit quality at insured institutions are also reflected in recent 

Banc of America Securities analysis of publicly available bank loan amendments.9 This study shows a significant increase in the number of loan amendments 

6 The annual interagency process reviews commercial loans over 

$20 million that are shared by three or more participants. 

7 Federal Reserve Board Press Release. November 10, 1999. 

8 “OCC’s Williams Warns of Credit Risk in the Banking System; Calls 

for Bankers to Scrutinize Loan Portfolios More Closely.” OCC Press 

Release. October 5, 1999. 

9 “Leveraged Loans: The Plot Thickens.” Banc of America Securities 

Syndicated Finance Research. November 15, 1999. This loan amendment analysis was completed using only publicly available information 

from Loan Pricing Corporation and Banc of America Securities LLC. 

generated because of covenant relief requests, from 22 

percent of all loan amendments during the last six 

months of 1998 to 45 percent during the first ten 

months of 1999. 

Corporate Bond Defaults Soared in 1999 

Trends in corporate bond defaults also indicate increasing levels of stress in the corporate sector. During 1999, 

147 issuers defaulted on $44.6 billion in long-term debt. 

Default rates as a percentage of volumes outstanding (or 

dollar default rates) have trended upward each year 

since 1996, reaching 2.2 percent for all corporate issues 

at year-end 1999. Much of the increase can be attributed 

to a rising dollar default rate for speculative-grade 

issues, which peaked in November 1999 at 8.2 percent. 

Measured as a percentage of all issuers, the default rate 

for speculative-grade issues rose to a post-1991 high of 

6 percent in September 1999 (see Chart 3). According 

to Moody’s, year-end 1999 default rates improved marginally but are expected to remain high through mid2000.10 In addition, domestic speculative-grade issuers 

reported twice as many issuer downgrades as upgrades 

during the fourth quarter of 1999, although the dollar 

volume of upgrades exceeded the dollar volume of 

downgrades by 55 percent.11 

10 “Corporate Bond Default Rates Highest Since 1991.” Moody’s
 

Investors Service. October 13, 1999.
 

11 “Moody’s Default Rate Pendulum.” Moody’s October 1999 Commentary. Moody’s Investors Service. October 18, 1999.
 

CHART 3 

The Default Rate on Corporate Bonds Has
 

Been Driven by Defaults on Speculative Issues
 

Issuer-Weighted 

Default Rate (%) 

15 All Corporate Issues 

10 

5 

0 

Speculative Issues 

Dec ’89 Dec ’91 Dec ’93 Dec ’95 Dec ’97 Dec ’99 

Source: Moody’s Investors Service 

Atlanta Regional Outlook 5 First Quarter 2000 
In Focus This Quarter
 

Why Are C&I Loan Losses Increasing 

Amid Strong Economic Growth? 

Several factors have contributed to the current signs of 

deterioration of C&I credit quality in an environment of 

favorable business conditions. These factors include 

global competition and deflationary pressures, an 

increase in corporate debt levels, loosened underwriting 

standards, and a greater appetite for risk. 

Global competition and deflationary pressures 

have squeezed revenues. An era of low inflation and 

intense global price competition has contributed to low 

or negative revenue growth in a number of domestic 

industry sectors, particularly commodities and manufacturing.12 The result has been an increase in loan 

losses and corporate bond defaults in these sectors. 

Moody’s noted that the industrial sector, weakened by 

low commodity prices, accounted for 64 percent of all 

defaults in 1999, with the oil and gas, steel, and shipping industries being especially hard-hit.13 For example, 

Standard & Poor’s (S&P) reports that third-quarter 

1999 earnings for the iron and steel sector declined 80 

percent from one year earlier after five consecutive 

quarters of negative year-over-year earnings growth. 

Initially, commodity price declines and the international economic turmoil in 1997 and 1998 resulted in 

slowed foreign C&I lending and increased net losses of 

C&I loans held in foreign offices. These losses accounted for the majority of net C&I loan losses in 1997 and 

1998. However, this adverse trend reversed itself in 

1999, when C&I loans held in domestic offices 

accounted for the majority of losses. 

Corporations are increasingly reliant on debt markets. Increasing levels of debt on corporate balance 

sheets have helped to foster C&I loan growth. The 

growth in corporate debt is partially a result of actions 

taken by firms to improve operating efficiency, including increasing merger and acquisition (M&A) activity 

and rising spending on fixed investments. Capital 

expenditures on fixed investments by businesses have 

increased at a steady rate since the 1990–91 recession, 

as evidenced by Chart 4. Cash flow has also been 

increasing, but at a slower rate, resulting in a growing 

“financing gap” that reached an annualized level of 

12 See also Richard A. Brown and Alan Deaton. “Falling Prices in
 

Commodities and Manufacturing Pose Continuing Risks to Credit
 

Quality.” Regional Outlook, third quarter 1999. http://www.fdic.gov/
 

bank/analytical/regional/ro19993q/na/t3q1999.pdf.
 

13 “Historical Default Rates of Corporate Bond Issuers, 1920–1999.”
 

Moody’s Investors Service, January 2000.
 

CHART 4 

The Financing Gap Has Widened

 for Nonfinancial Corporations 

$ Billions “Financing Gap” 

900 

700 

500 

300 

100 

Capital Expenditures Cash Flow 

’80 ’82 ’84 ’86 ’88 ’90 ’92 ’94 ’96 ’98 

Note: 1999 data are annualized based on 3Q99 data. 

Source: Federal Reserve Board (Haver Analytics) 

$142 billion in the third quarter of 1999. Where cash 

flow has not been available to finance investment, firms 

have turned primarily to debt financing as opposed to 

equity financing. Net new corporate equity issues by 

nonfarm nonfinancial corporations have been negative 

in each year since 1993, while net new corporate bond 

issuance has increased from $75 billion in 1993 to $219 

billion in 1998. 

Loosened underwriting standards in 1997 and early 

1998 are contributing to current losses. Signs of 

stress in C&I loan portfolios can be partially attributed 

to loosened underwriting standards in 1997 and early 

1998. During 1997 and early 1998, loan underwriting 

standards loosened, accompanied by reduced spreads 

and pricing. In May 1998, the Federal Reserve Board 

Senior Loan Officer Opinion Survey on Bank Lending Practices reported that domestic banks were “generally eager to make loans to businesses” and that 

during early 1998 “a large percentage cut their spreads 

on such loans.” Moody’s describes the second half of the 

1990s as a “mini credit cycle.” The cycle began in 1995, 

when the strong economy, accompanied by falling interest rates and low loan losses and default rates, encouraged investor demand for high-yield bonds and loans.14 

A record number of first-time speculative-grade deals 

were also brought to market during 1997 and early 

1998. The increase in the volume of issuance was itself 

enough to push the default rate lower, which in turn may 

have fueled investor demand for additional high-risk 

bonds. However, the Asian crisis during 1997 and the 

Russian debt default during the second half of 1998 

14 “Default Rate Pendulum.” October 18, 1999. 

Atlanta Regional Outlook 6 First Quarter 2000 
In Focus This Quarter
 

caused new issuance of speculative-grade bonds to slow 

significantly while defaults rose sharply, to a rate of 6 

percent by issuer in September 1999. While speculativegrade bond issuance declined, banks stepped in to fill 

the void by raising originations of highly leveraged 

loans between second-quarter 1998 and fourth-quarter 

1999.15 

Financial markets have evidenced greater risk 

appetite. While the ratio of speculative-grade bond 

issues to total corporate bond issues has remained fairly stable at approximately 40 percent during the past 

decade, the composition of borrowings has shifted substantially. Moody’s reports a shift in the distribution of 

bond issue ratings within the speculative-grade category toward the lower end of the ratings scale (see Chart 

5).16 Evidence of this shift is demonstrated by the fact 

that bonds rated B3 or lower currently comprise approximately 35 percent of all speculative-grade issues, a 

record high and up from 24 percent in 1995.17 Furthermore, almost 50 percent of the issuers that defaulted 

during the year ending September 1999 were rated for 

three years or less.18 This change in the composition of 

ratings has contributed to the current increase in speculative-grade defaults and could affect the future volatility and liquidity of the market. The current high volume 

of corporate bond defaults reflects the looser standards 

in 1997 and 1998 for corporate debt issued by low-rated 

first-time issuers, who accounted for 40 percent of rated 

15 LPC Gold Sheets. January 10, 2000.
 16 Moody’s January 2000 Commentary. January 18, 2000.
 

17 “Refunding Risk for Speculative Grade Borrowers.” Moody’s Special Comment. Moody’s Investors Service. December 15, 1999.
 

18 “Default Rate Pendulum.” October 18, 1999.
 

CHART 5 

bond defaults in 1999.19 This relationship is analogous 

to the current increase in net C&I charge-offs partially 

attributable to weakened underwriting standards in 

1997 and early 1998. 

The Increase in Leveraged Lending Could 

Result in a Riskier Mix in C&I Loan Portfolios 

Leveraged lending comprises an important part of the 

syndicated lending market and generates considerable 

fee income for financial institutions. Leveraged loans 

have grown from 12 percent of total syndicated loan 

originations in 1995 to 32 percent in 1999 (see Chart 6, 

next page). Leveraged syndicated loan originations grew 

19 percent to $320 billion in 1999, as investors were 

seeking higher risk-adjusted returns and lenders were 

seeking higher fees. Paine Webber analysts estimate that 

leveraged lending accounts for over 80 percent of syndicated loan fees and profits earned by loan underwriters.20 

Highly leveraged lending increased to a new record of 

$190 billion in 1999.21 This growth in loan originations 

reflects the current high corporate demand for loans, and 

by definition these loans are being made to borrowers 

with higher-than-normal levels of financial leverage and 

risk. In return for their higher risk profile, leveraged borrowers must compensate financial institutions through 

higher pricing and higher fees. 

19 Moody’s January 2000 Commentary. January 18, 2000.
 

20 “The Biggest Secret of Wall Street.” Paine Webber Equity Research.
 

May 14, 1999.
 

21 Loan Pricing Corporation defines highly leveraged loans as those
 

for which pricing exceeds 250 basis points over LIBOR and generally involves sub-investment-grade credits.
 

The Composition of the Rated Bond Market Has Shifted

 toward the Lower Part of the Speculative-Grade Issues 

Distribution of Issuer Ratings 

as a Percentage of Total Issuers 

Note: Unrated issues of corporate debt fall below the speculative-grade “C” rating. 

Source: Moody's Investors Service 

Aaa Aa1 Aa2 Aa3 A1 A2 A3 Baa1 Baa2 Baa3 Ba1 Ba2 Ba3 B1 B2 B3 Caa1 Caa2 Caa3 Ca C 

Moody’s Bond Ratings 

January 1998 January 2000 

Investment-Grade Ratings Speculative-Grade Ratings 

0 

2 

4 

6 

8 

10 

12 

Atlanta Regional Outlook 7 First Quarter 2000 
In Focus This Quarter
 

CHART 6 

$ Billions As a Percentage of 

Total Syndicated Loans 

Loans to Leveraged Companies Represent 

a Greater Portion of Syndicated Loans 

Originations of Syndicated Loans to Leveraged Companies 

Note: 1999 data are annualized based on 3Q99 data. 

Source: Loan Pricing Corporation 

’90 ’91 ’92 ’93 ’94 ’95 ’96 ’97 ’98 ’99 

400 

0 

100 

200 

300 

40 

0 

10 

20 

30 

Leveraged lending volumes have recently been partially 

driven by M&A lending, which comprised over 30 percent of the total syndicated loan market in 1999. M&A 

activity approached $1.4 trillion in total volume during 

1999, increasing the demand for capital and driving corporations to the loan market.22 Approximately 22 percent of leveraged loans originated in 1998 were to the 

media and telecommunications industries, which have 

experienced significant levels of M&A activity.23 Leveraged buyout activity contributed an additional 15 percent to leveraged lending volumes, surpassing 1998 

levels in quantity. 

Where Is Business Credit Quality Heading? 

The future direction of business credit quality will be 

influenced by several factors, including the condition of 

the economy, growth in the indebtedness of corporate 

borrowers, exposure to vulnerable industry sectors, the 

interest rate environment, the development of emerging 

markets, and underwriting standards. 

Economic growth will remain an important determinant of credit quality. Should economic growth slow 

and corporate profits decline, the demand for C&I loans 

is likely to fall, and problem asset levels are likely to 

rise. A recent S&P survey of global credit conditions 

noted that excessive credit, attributable to unsustainable 

corporate indebtedness and falling asset values, has 

weakened the financial systems of 20 nations. As for 

credit expansion in the United States, the survey noted 

22 Houlihan Lokey’s Mergerstat. www.mergerstat.com. 23 “The Biggest Secret of Wall Street.” May 14, 1999. 

that the ratio of private sector loans outstanding to gross 

domestic product rose from 101 percent in 1995 to 142 

percent in 1999. S&P also noted evidence that banks’ 

C&I loan portfolios may be relying too heavily on loan 

repayments based on projections that are realizable only 

if the current economic expansion continues. S&P estimates that 5 to 15 percent of bank loans could default 

should the United States experience a significant downturn in the stock market leading to a hard landing for the 

domestic economy.24 

Continued growth in corporate indebtedness could 

contribute to increased losses and defaults. The 

growth rate of corporate debt has surpassed the growth 

rate of the economy in each year since 1994. A widening financing gap and increasing debt levels could pose 

problems if there are adverse changes in the interest rate 

environment or if corporate revenue growth slows. Rising rates will increase the costs of servicing debt, while 

a slowdown in revenue growth would reduce the cash 

flow available to service outstanding debt. Under such a 

scenario, business bankruptcies and failures are likely 

to rise, causing increased loan losses and bond defaults. 

Lending to some industries involves high-risk exposures. Despite the strength of the U.S. economy, some 

domestic industries are continuing to experience stress. 

Exposures to weakened industry sectors, such as health 

care and oil and gas, could negatively affect C&I credit 

quality at insured institutions. One way to evaluate the 

relative riskiness of firms operating in a given industry 

is through KMV Corporation’s® Expected Default FrequencyTM (EDFTM) analysis. KMV Corporation® has 

developed a proprietary method of measuring the 

degree of credit risk inherent in corporate borrowers by 

calculating an EDFTM score to estimate the probability 

that a firm will default on its obligations within one 

year.25 Chart 7 diagrams syndicated loan exposures 

along with December 1999 EDFTM scores and the direction of change since December 1998. This chart illustrates one measure of the risk associated with the 10 

industry sectors having the highest expected default 

24 “Global Financial System Stress: The Weak, the Vulnerable, and 

Those Limping Toward Recovery.” Standard & Poor’s. December 17, 

1999. 

25 KMV’s® proprietary calculation for EDFTM is based on (1) the current market value of the firm, (2) the structure of the firm’s current 

obligations, and (3) the vulnerability of the firm to large changes in 

market value. Multiplying industry originations by median industry 

EDFTM scores provides an estimate of expected default volumes. This 

figure provides a more meaningful measure of aggregate lending risk 

exposure than pure origination volumes alone and can be used to rank 

industry exposures. 

Atlanta Regional Outlook 8 First Quarter 2000 
 

In Focus This Quarter
 

volume based on the volume of 1999 syndicated loan 

originations. In 1999, loans originated to mortgage 

lenders (including subprime lenders), communications 

firms, oil and gas firms, health care firms, and retail 

trade organizations generated the five highest expected 

default volumes among 50 broad industry sector classifications. 

The interest rate environment and refunding risk 

affect the demand for and availability of credit. 

Declining interest yield spreads from 1996 to 1998 

benefited borrowers. As spreads declined, the rate of 

syndicated loan growth increased and refinancing 

activity was high. Increases in spreads since 1998, 

along with higher interest rates, have caused refinancing activity to slow significantly. However, rising rates 

have not significantly affected origination volumes, as 

new debt continues to come into the market. Rising 

interest rates and refunding risk particularly affect 

speculative-grade borrowers. Higher interest rates 

would raise businesses’ cost of borrowing, potentially 

decreasing the demand for business credit and impairing borrowers’ ability to repay their debts. Once a corporation’s debt service ability is compromised, access 

to new capital markets can become limited. A sharp 

rise in interest rates would particularly impair the ability of highly leveraged firms to repay floating-rate debt 

obligations. 

Refunding risk continues to be a concern for speculative-grade borrowers as they face potential problems 

refinancing the maturing portions of long-term debt. 

The current tightening of terms in the C&I market and 

increasing default rates heighten refunding risk to borrowers. Rising interest rates or limited access to secondary markets could also increase refunding risk. This 

situation could continue to be problematic, since a rising volume of speculative-grade borrowings, consisting 

largely of unsecured bank debt, matures in 2001 and 

2002. Specifically, $64 billion in speculative-grade debt 

matures in 2001 and 2002, and approximately 63 percent of the debt is unsecured.26 

Potential growth in new markets presents both 

opportunities and challenges. The Internet and European syndicated loan markets represent both future 

potential growth areas and possible sources of credit 

risk for C&I lenders. The Internet has introduced large 

new markets to the loan and bond markets and has 

26 “Refunding Risk for Speculative Grade Borrowers.” December 15, 

1999. 

CHART 7 

Lending to Some Industries May 

Involve Higher Risk Exposures 

Change in Expected Default FrequencyTM (EDFTM) 

for the 12 Months Ending in December 1999 

6 

8 

–2 0 2 4 6 8 10 12 14 16 18 20

 EDFTM as of December 1999 

1 

2 4 5

3 

6 

7 

9 

10 

4 

2 

0 

–2 

Industry Name and Origination Dollars in Billions:

 1. Communication Services - $234.6

 2. Motor Vehicles and Parts - $133.1

 3. Chemicals and Drugs - $96.1

 4. Retail Trade - $92.1

 5. Wholesale Trade - $46.5

 6. Health Care Services - $42.3

 7. Oil & Gas Extraction - $41.8

 8. Entertainment - $33.5

 9. Mortgage Lenders and Mortage-Backed Securities - $20.2 

10. Hotels & Lodging Services - $20.2 

Note: Data and bubble size represent total syndicated loan originations
 

for the year ending 1999.
 

Sources: Securities Data Corporation; KMV Credit Monitor®
 

increased market efficiency. The “Internet economy” 

grew 68 percent from the first quarter of 1998 to the 

first quarter of 1999, with annual revenue expected to 

exceed $500 billion in 1999.27 Internet technology has 

improved the efficiency of the syndicated loan markets, 

with recent changes including the development of public price reporting, credit ratings, and Internet sites for 

online trading.28 Increased levels of credit risk could 

result from the volatility of Internet stock prices and the 

competitive disadvantage faced by firms that do not 

have an Internet presence but must compete against 

firms that do. 

While the majority of syndicated loan financing currently occurs in the United States, analysts predict that 

syndicated lending activity in Europe will accelerate 

significantly because of increased cross-border competition generated by the introduction of the euro and new 

financing needs. In addition, the European high-yield 

bond market is still developing but produced $6.8 billion of volume in the third quarter of 1999, or 61 per27 “Internet Indicators.” The Center for Research in Electronic Commerce at the University of Texas Graduate School of Business. October 27, 1999. 

28 “Syndicated Loan Market Soars as Efficiency Increases.” The Wall 

Street Journal. December 6, 1999. 

Atlanta Regional Outlook 9 First Quarter 2000 
In Focus This Quarter
 

cent of the total market.29 Domestic lenders have begun 

to compete for this market but face credit risks because 

the European markets also pose sovereign and foreign 

exchange risk. 

Underwriting Remains the Key to Assessing 

C&I Credit Quality 

The August 1999 OCC Survey of Credit Underwriting 

Practices reported some tightening of commercial loan 

underwriting standards. However, loan officers also 

reported increased embedded risks in commercial loan 

portfolios for the fifth consecutive year. Survey respondents attributed the increased risks to weakened underwriting standards in previous years. The November 

1999 Federal Reserve Board Senior Loan Officer 

Opinion Survey on Bank Lending Practices found that 

30 percent of domestic banks reported increasing risk 

premiums, credit line costs, and loan spreads during the 

preceding three months. Loan 

officers cited an uncertain or 

unfavorable economic outlook, 

an expected worsening of industry-specific problems, and a 

reduced tolerance for risk as reasons for tightening C&I lending 

standards. 

Despite signs of tightening underwriting standards, the 

mix of credits appears to be riskier than in recent times. 

The OCC issued an advisory to banks in May 1999 

warning of potential problems with leveraged lending. 

The OCC stated that highly leveraged corporations 

could be particularly vulnerable to economic weakness 

and may not be able to compete effectively in a rising 

29 LPC Gold Sheets, Vol. XII, No. 44. Loan Pricing Corporation. 

November 15, 1999. 

interest rate environment. The OCC also addressed 

reliance on enterprise value loans, which are often used 

to support leveraged lending. Enterprise values are calculations based on projections of the future income of a 

firm. If such estimates are overly optimistic, or if the 

company fails to meet the assumptions underlying these 

estimates, the lender may be subject to considerable 

credit risk. The last interagency SNC review also noted 

instances of inadequate documentation and support for 

enterprise loans.30 

Summary 

C&I lending is one of the largest and fastest growing 

lending lines at insured institutions. Recent growth in 

C&I lending can be attributed to a number of factors, 

including a favorable economy, merger and acquisition 

activity, and other sources of high loan demand, strong 

asset quality, aggressive pricing, and attractive fee 

income. While indicators of C&I loan performance 

remain generally strong, signs of deterioration in commercial credit quality have begun to surface. These 

signs are cause for some concern because they are surfacing during a period of remarkable economic 

strength. Increasing corporate indebtedness, signs of 

corporate stress, and adverse trends in corporate bond 

defaults suggest that an economic downturn could result 

in a much more challenging environment for business 

credit quality. 

By Arlinda Sothoron, Senior Financial Analyst 

Alan Deaton, Economic Analyst 

30 Remarks by OCC First Senior Deputy Comptroller and Chief Counsel Julie L. Williams before the Robert Morris Associates Conference 

on Lending and Credit Risk Management, October 5, 1999. 

Atlanta Regional Outlook 10 First Quarter 2000 
In Focus This Quarter
 

Local Industries in the Global Economy
 

•	 The contribution of international trade to U.S. 

economic activity has risen rapidly during the 

past decade. The U.S. economy has been increasingly influenced by conditions abroad, such as the 

recent financial market turmoil in several emerging markets. 

•	 Canada, Japan, and Mexico are the largest U.S. 

trading partners, accounting for approximately 

40 percent of U.S. trade. Western Europe and Asia 

(excluding Japan) also account for a large share 

of U.S. trade. 

•	 The importance of trade at the industry level 

varies widely. The industries most dependent on 

trade, including machinery and transportation 

equipment, also account for a large share of U.S. 

trade. 

The value of goods and services traded on international 

markets has more than doubled during the past decade. 

More goods and services than ever are being shipped 

abroad and imported from all parts of the globe. Consequently, U.S. economic activity is increasingly influenced by the flow of goods, services, and capital across 

national borders. 

The increasing importance of international trade is 

reflected in different types and levels of exposure to 

international markets. First, total exports and imports 

compared with overall economic activity confirm the 

increasing contribution of trade to the economy as a 

whole. Second, the amount of U.S. trade with foreign 

markets, although widely varied, is concentrated in a 

small number of countries, namely Canada, Japan, and 

Mexico. Consequently, economic conditions in these 

countries are particularly important in assessing the 

influence of global economic conditions on U.S. trade. 

Third, the level of exposure to international trade across 

industry sectors varies considerably. Some industries are 

not influenced greatly by activity in international markets, while for other, more trade-dependent industries, 

conditions in the world economy are an important factor 

in determining the level of sales and profit. The exposure 

to international markets, either through reliance on trade 

with particular countries or via industries with a significant exposure to international markets, is an important 

consideration for lenders seeking to determine a firm’s 

future profitability and financial condition. 

International Trade Is of Growing Importance 

Over the past 30 years, international trade has grown 

more quickly than the economy as a whole. Exports, 

which include both merchandise and services, have 

risen from less than 5 percent of U.S. gross domestic 

product (GDP) in 1970 to approximately 12 percent 

today. The merchandise component accounts for about 

73 percent of exports and includes manufactured goods, 

agricultural products, and raw materials such as metals 

and oil. The services component of exports, accounting 

for about 28 percent of total exports, includes travel services, passenger fares, royalties, freight and port services, and a number of smaller sectors such as financial 

and educational services. 

Imports also account for a growing share of U.S. consumption of goods and services, exceeding 15 percent 

of U.S. GDP in 1999, up from 6 percent in 1970. Merchandise is the largest component of imports, accounting for 83 percent, while services account for 17 percent 

(see Table 1, next page). 

Although trade in services has grown quickly for many 

years, merchandise still accounts for the majority of all 

trade. The dominance of merchandise is attributable, in 

part, to the difficulty of trading many types of services. 

With few exceptions, services are generally produced 

and consumed within a local market because they cannot be transported easily and are subject to language 

and cultural barriers. Hospitals, dry cleaners, and movie 

theaters, for example, serve well-defined local markets 

and produce products that cannot be traded competitively on international markets. Although trade in services such as travel continues to grow, the remainder of 

this article focuses primarily on the dominant merchandise component. 

U.S. Trade Activity Has Reflected Recent 

Global Economic Turmoil 

Over time, conditions in the international economy have 

become an increasingly important influence on U.S. 

growth, since a rising share of all domestically produced goods and services is sold abroad. Similarly, an 

increasing volume of imported goods and services 

implies a higher level of competition for domestic producers that compete directly with imports. 

Atlanta Regional Outlook 11	 First Quarter 2000 
In Focus This Quarter
 

TABLE 1 

Merchandise Is the Largest Component of Trade 

DOLLAR VALUE* PERCENT 1999 

(1998, $ MILLIONS) OF TOTAL GROWTH** 

Exports $ 933,910 100.0% 1.8% 

MERCHANDISE 682,138 73.0% 0.8% 

AGRICULTURE AND 

RELATED COMMODITIES 26,603 2.8% –1.8% 

MINERAL COMMODITIES 6,644 0.7% –17.4% 

MANUFACTURED GOODS 593,297 63.5% –0.1% 

OTHER MERCHANDISE 55,593 6.0% 39.5% 

SERVICES 263,662 28.2% 4.3% 

TRAVEL 71,250 7.6% 3.0% 

PASSENGER FARES 19,996 2.1% 2.7% 

ROYALTIES AND LICENSE FEES 36,807 3.9% 4.1% 

FREIGHT AND PORT SERVICES 25,520 2.7% 6.4% 

OTHER SERVICES 110,089 11.8% 5.0% 

ADJUSTMENTS*** (11,890) 

Imports $ 1,098,193 100.0% 10.3% 

MERCHANDISE 907,647 82.6% 10.4% 

AGRICULTURE AND 

RELATED COMMODITIES 22,859 2.1% –2.2% 

MINERAL COMMODITIES 38,619 3.5% 5.6% 

MANUFACTURED GOODS 803,384 73.2% 11.6% 

OTHER MERCHANDISE 42,786 3.9% –0.6% 

SERVICES 181,015 16.5% 9.6% 

TRAVEL 56,105 5.1% 7.2% 

PASSENGER FARES 19,797 1.8% 8.3% 

ROYALTIES AND LICENSE FEES 11,293 1.0% 11.0% 

FREIGHT AND PORT SERVICES 30,460 2.8% 11.4% 

OTHER SERVICES 63,360 5.8% 10.9% 

ADJUSTMENTS*** 9,531 

* Sum of components may not equal total due to rounding.
 

** First three quarters of 1999 versus first three quarters of 1998.
 

*** Because of different methods of estimating the merchandise and services components of trade, an adjustment
 

term is necessary. Consequently, percentages may not sum to 100.
 

Sources: Bureau of Economic Analysis; Bureau of Census
 

Atlanta Regional Outlook 12 First Quarter 2000 
In Focus This Quarter
 

During the past two and a half years, for example, the 

international economy has been buffeted by a series of 

crises that resulted in steep exchange rate depreciations 

for a number of countries and a marked slowdown in 

economic growth in many emerging markets. Although 

the U.S. economy remained surprisingly strong during 

the worst of the emerging markets crises, the fallout 

was evident in the diverging performance of U.S. 

exports and imports over the period. 

From mid-1997 through mid-1999, U.S. exports were 

generally flat, reflecting the sluggish pace of growth in 

several important U.S. export markets. Export prices 

fell by 4 percent over the period in response to weak 

demand for U.S. exports. In particular, exporters of 

agricultural products, basic manufactured goods, and 

commodities faced rapidly deteriorating conditions in 

several important overseas markets. For example, the 

value of merchandise exports to the Pacific Rim fell by 

15 percent during the first six months of 1999 compared with the same period in 1997 because of the 

recent financial market turmoil in the region. 

U.S. imports continued to grow during the period, 

however, reflecting both strong demand for imported 

goods and falling prices. In fact, average import prices 

fell by 5 percent between 1997 and 1999. At the same 

time, competition from imports limited the pricing 

power of domestic producers that compete with goods 

produced abroad. Although producers that compete 

with cheaper imports experienced adverse effects on 

profitability, consumers and firms that purchased 

goods from abroad generally benefited from falling 

import prices.1 

The slowdown in U.S. export activity and the acceleration of import growth have resulted in an increasing 

trade imbalance (see Chart 1). The U.S. trade deficit, 

which reached a record $26.5 billion in November, has 

raised concerns among analysts about the vulnerability 

of the dollar. Faster growth abroad or a slowdown in 

U.S. growth could convince foreign investors to 

increase purchases of assets outside the United States, 

resulting in a sell-off of the dollar. Depending on the 

severity and speed of a sell-off, heightened financial 

market volatility and rising U.S. import prices could 

result. Although potentially many forces are at work in 

1 Weak import prices are a factor cited by analysts to explain the 

benign performance of U.S. inflation during the past few years. 

CHART 1 

U.S. Import Growth Has Accelerated 

while Exports Remain Flat 

$ Billions 

350 

300 

250 

200 

150 

100 

Imports 

Exports 

1992 1993 1994 1995 1996 1997 1998 1999 

Source: Bureau of Economic Analysis 

such a scenario, rising inflation or a falling dollar may 

ultimately result in higher interest rates and slower U.S. 

growth. The extent to which U.S. trade would be affected by such a scenario is difficult to assess, since 

changes in the prices of either imports or exports would 

result in both positive and negative effects on firms’ 

costs, revenue, and profitability.2 

Most U.S. Trade Is Concentrated 

in a Few Foreign Markets 

Because the United States trades with most nations, 

economic conditions abroad are one of the critical 

factors that determine the growth of U.S. trade. Foreign demand for U.S. goods and services depends on 

the strength of the markets to which exporters ship 

their goods. Consequently, economic weakness 

abroad often results in slower U.S. export growth. 

Economic conditions abroad also influence the level 

of import competition that U.S. firms experience. 

Foreign firms facing slack demand in their own 

domestic markets, much like manufacturers in Southeast Asia during the recent market turmoil, may 

2 During the early 1980s, the dollar rose by roughly 50 percent, as 

measured against a trade-weighted basket of currencies. The 

increase in the value of the dollar made U.S. exports much more 

costly on world markets and contributed to financial stress among 

export-dependent manufacturers and agriculture producers. Beginning in mid-1985 the dollar fell sharply, back to its pre-appreciation 

level. The resulting improvement in U.S. competitiveness contributed to robust growth in U.S. exports that lasted during the rest 

of the 1980s. 

Atlanta Regional Outlook 13 First Quarter 2000 
In Focus This Quarter
 

reduce prices of their U.S.-bound goods to compete 

more effectively with U.S. producers.3 

Although the U.S. trades with many nations, a large 

share of U.S. trade is concentrated among a small number of countries. Canada, Mexico, and Japan account 

for more than 40 percent of merchandise exports and 

imports. Asia (excluding Japan) and Western Europe 

each account for just over 20 percent of U.S. exports 

and a broadly similar share of imports. Central and 

South America, despite proximity to the United States, 

account for less than 10 percent of exports and only 

5 percent of imports (see Chart 2). 

The United States has routinely run a trade deficit with 

its largest trading partners. The trade deficit with 

Canada was $22.8 billion through the first three quarters of 1999. The trade deficit with Mexico topped 

$18.8 billion during the same period. The trade 

deficits with Japan and China, by far the two largest at 

$53.4 billion and $49.4 billion, respectively, accounted for approximately 40 percent of the total U.S. merchandise trade deficit through the first three quarters 

of 1999. 

The Importance of Trade Varies 

among Industries 

The level of export activity or the intensity of import 

competition also varies across industries. Besides the 

overall dollar volume of exports, industries differ in the 

proportion of total production that is exported. 

Although some industries, such as leather products, 

account for a relatively small share of total U.S. 

exports, exports from this industry make up a large 

share of all U.S. leather goods production. In cases 

such as this, conditions in export markets are important 

for producers even if total export sales from a particular industry are small. 

Industries also differ in the share of total spending 

devoted to imports. Imports account for a relatively 

3 From the perspective of a foreign exporter, increased sales of goods 

abroad, even at reduced prices, may be a preferred strategy to offset 

lower sales within its own weaker domestic market. A foreign steel 

mill facing weak sales in its home market may choose to sell its output below cost on the world market if it can still cover its fixed costs 

of operation. There also may be an incentive to maintain or even 

expand market share and recoup current losses in the future when 

prices rebound. 

CHART 2 

Canada Is the Largest U.S. Trading Partner 

(1Q99 through 3Q99, ranked by exports) 

Eastern Europe 

Africa 

Central/South America 

Japan 

Mexico 

Asia (excluding Japan) 

Western Europe 

Canada 

Source: Bureau of Census 

–250 

$ Billions 

–150 –50 50 150 250 

Imports Exports 

small portion of all domestic spending on farm products such as grains and livestock, for example, while 

imports account for a relatively large share of all U.S. 

oil consumption. These differences expose U.S. industries to varying levels of competition from abroad. In 

industries characterized by high levels of import competition, import prices may largely shape the domestic 

pricing environment and, by extension, the revenue and 

profit growth of domestic firms. 

For the purposes of this article, industries can be 

assigned to one of three broad categories depending on 

their exposure to international markets either through 

exports or through the intensity of import competition. 

Firms in Less Exposed Industries are not directly influenced by conditions in the global markets. Export markets are not a particularly important source of revenue, 

and imports are a negligible share of all domestic consumption of goods produced by these industries. In 

contrast, some industries are highly exposed through 

their reliance on export markets, through competition 

from imports, or in some cases, through both. For firms 

in these Highly Exposed Industries, conditions in international markets are clearly one of the important factors influencing current and prospective financial 

performance. Industries not part of either group, or 

Moderately Exposed Industries, face some competition 

from abroad and may earn a relatively small amount of 

revenue from export markets. 

To gauge these differences more fully, a measure 

of exposure to international markets was calculated for 

a set of 26 industries (20 manufacturing industries, 

4 mining industries, and 2 agriculture sectors). Table 2 

Atlanta Regional Outlook 14 First Quarter 2000 
In Focus This Quarter
 

TABLE 2 

Industry Exposure to International Trade 

IMPORT SHARE OF U.S. CONSUMPTION 

LOW MEDIUM HIGH 

EXPORT 

SHARE OF U.S. PRODUCTION 

LOW 

PRINTING AND PUBLISHING 

FOOD PRODUCTS 

LUMBER AND WOOD 

PRODUCTS 

PETROLEUM AND COAL 

PRODUCTS 

AGRICULTURAL SERVICES, 

FORESTRY, AND FISHING 

FURNITURE AND FIXTURES 

OIL AND GAS EXTRACTION 

MEDIUM 

COAL MINING 

TOBACCO PRODUCTS 

NONMETALLIC MINERALS, 

EXCEPT FUELS 

FABRICATED METAL 

PRODUCTS 

METAL MINING 

PAPER AND ALLIED 

PRODUCTS 

TEXTILE MILL PRODUCTS 

STONE, CLAY, AND 

GLASS PRODUCTS 

RUBBER AND PLASTIC 

PRODUCTS 

PRIMARY METAL INDUSTRIES 

MISCELLANEOUS MANUFACTURING INDUSTRIES 

APPAREL PRODUCTS 

HIGH 

FARM PRODUCTS CHEMICALS AND ALLIED 

PRODUCTS 

INSTRUMENTS AND 

RELATED PRODUCTS 

TRANSPORTATION 

EQUIPMENT 

INDUSTRIAL MACHINERY 

AND EQUIPMENT 

ELECTRONIC EQUIPMENT 

LEATHER AND LEATHER 

PRODUCTS 

Highly Exposed Industries 

Moderately Exposed Industries 

Less Exposed Industries 

summarizes the results of the assessment.4 Each row 

shows industries that have high, medium, or low 

reliance on export markets, defined as the share of U.S. 

production in a particular industry that is exported. 

Each industry was ranked by this measure, with the 7 

highest industries placed in the High category, the 7 

lowest in the Low category, and the remaining 12 in the 

4 Export share of production (rows in Table 2) was calculated as the 

ratio of inflation-adjusted exports at the industry level divided by 

inflation-adjusted production in that industry (Gross Output by Industry from the Bureau of Economic Analysis was used as a measure of 

industry production). The import share of consumption (columns in 

Table 2) was calculated as the share of inflation-adjusted industry 

imports divided by inflation-adjusted domestic production less 

exports plus imports. All calculations were based on 1997 data, the 

latest industry-level production data available. 

Medium category.5 Table 2 shows, for example, that a 

relatively low proportion of production in the printing 

and publishing, lumber and wood products, and oil and 

gas extraction industries is exported. In contrast, a relatively high percentage of production in the farm products sector, chemicals, and transportation equipment 

industries is exported. 

5 This allocation, while completely arbitrary, roughly corresponds to a 

distribution where 50 percent of the industries are assigned to the 

Medium category, with the remaining 50 percent evenly allocated 

between the High and Low categories. Breakpoints for the distribution of industries by export share of production were as follows: Low: 

less than 7 percent; High: greater than 13 percent. 

Atlanta Regional Outlook 15 First Quarter 2000 
In Focus This Quarter
 

The industries in each column are categorized by the 

share of U.S. consumption expenditures in a particular 

industry that are satisfied by imports. Again, the Low 

and High categories each include 7 industries, and the 

Medium category includes the remaining 12 industries.6 

On the basis of this analysis, for example, a relatively 

low share of U.S. consumption of food, fabricated metals, and farm products is imported. In contrast, a large 

share of U.S. consumption of oil, apparel, and electronic equipment is imported.7 

As shown in the lower right cell of the table, four industries are highly exposed to both export markets and 

import competition. These industries—transportation 

equipment, industrial machinery, electronic equipment, 

and leather products—account for slightly less than half 

of total U.S. exports and a similar percentage of total 

U.S. imports. Not only are these industries more closely tied to international markets than most other industries examined, but they also account for a large share of 

U.S. international trade. 

Using the terminology introduced above, Highly 

Exposed Industries are defined as those assigned to 

either of the High categories; industries in this group 

either are very reliant on export markets or face high 

levels of import competition. Less Exposed Industries 

are defined as those that have little exposure to either 

export markets or import competition; they are shown 

in the upper left cell in the Low classification. The 

remaining industries are defined as Moderately 

Exposed Industries. 

Chart 3 illustrates the distribution of establishments in 

each of the three categories by Region.8 Among the 

6 Breakpoints for the distribution of industries by import share of 

consumption were as follows: Low: less than 9 percent; High: greater 

than 25 percent. 

7 Although not directly included in the analysis, most domestically 

produced services also have minimal reliance on export markets and 

face little import competition. Retail trade, construction, local transportation services, and government, for example, all operate in relatively sheltered markets and are dependent on the health of the local 

economy. Particular firms may engage in high levels of international activity in tradable services such as travel, but manufacturing, 

mining, and agriculture account for the majority of imports and 

exports. 

8 An establishment is defined as a single physical location at which 

business is conducted or services or industrial operations are performed. It is not necessarily identical with a company or enterprise, 

which may consist of one or more establishments. Data are from 

County Business Patterns (Bureau of Census, 1997). 

CHART 3 

Atlanta Boston Chicago Dallas Kansas Memphis New San 

City York Francisco 

Number of Establishments* Classified by 

International Trade Exposure by Region 

0 

10,000 

20,000 

30,000 

40,000 

50,000 

60,000 

FDIC Region 

Source: Bureau of Census, 1997 County Business Patterns Database 

*An establishment is a single physical location at which business is conducted. 

Highly Exposed Industries 

Moderately Exposed 

Industries 

Less Exposed Industries 

group of industries analyzed, most are in the Moderately Exposed Industries category. Of the FDIC Regions, 

Atlanta, Chicago, and San Francisco have the greatest 

number of establishments in this category. The Chicago 

and San Francisco Regions lead in the number of establishments in the Highly Exposed Industries group, followed by the New York and Dallas Regions.9 Less 

Exposed Industries account for a relatively small number of establishments. As suggested above, however, 

most service-sector, construction, and government 

enterprises, while not part of this analysis, could be 

classified as Less Exposed.10 

Although this analysis highlights the varying level of 

direct exposure to international markets, industries also 

may be exposed through a less direct secondary channel. 

Several industries, although not highly exposed themselves, are suppliers to Highly Exposed Industries. For 

example, the rubber and plastics industry produces 

goods that are used in the manufacture and assembly of 

transportation equipment, a Highly Exposed Industry. 

9 An alternative way of analyzing the establishment data is to calculate the percentage of all establishments across the 25 industries that 

are in Highly Exposed Industries. On the basis of this calculation, the 

Dallas Region ranks highest at 42 percent because of the large number of establishments engaged in oil and gas extraction. For the 

remaining Regions, the percentages vary between 25 percent and 35 

percent. Across all industries (including services and other sectors not 

part of this analysis), the percentage of Highly Exposed Industries in 

each Region ranges from 1.7 percent (Atlanta Region) to 3.4 percent 

(Boston Region) of total establishments. 

10 These data do not include a count of establishments in the farm 

products sector (Standard Industrial Code (SIC) 01 and SIC 02). 

Therefore, 25 industries are represented in the establishment data, and 

not 26 as in Table 2. 

Atlanta Regional Outlook 16 First Quarter 2000 
In Focus This Quarter
 

Consequently, conditions in export markets for transportation equipment are of particular interest for manufacturers of certain types of rubber and plastic products. 

These supplier industries are also vulnerable to import 

competition through this secondary exposure to international markets. A transportation equipment manufacturer, in response to heightened competition in international 

markets for its products, may switch from a domestic 

supplier of rubber products to a cheaper foreign supplier 

if a favorable price differential emerges. Therefore, 

assessing the exposure of industries to either exports or 

imports requires consideration of any secondary linkages 

between suppliers and purchasers of industry products. 

Summary 

The contribution of international trade to overall U.S. 

economic activity has been increasing for a number of 

years. The growing significance of trade has been highlighted by the recent series of economic and financial 

crises across the globe. One result of recent global economic turmoil has been a slowdown in U.S. export 

growth resulting from both slumping international 

demand for U.S. goods and services and weak prices. 

Import growth has continued unabated, largely because 

of strong U.S. growth, leading to a rapidly widening 

trade deficit. The effects of import and export growth 

on particular industries vary because of differing levels 

of reliance on export markets and the extent of import 

competition. This analysis suggests that several industries are highly exposed to changing global economic 

conditions. Lenders should be aware that for firms in 

these industries, changes in global economic conditions, including demand for U.S. exports and prices of 

both imports and exports, largely determine pricing, 

revenue growth, and profitability. 

Paul C. Bishop 

Senior Financial Economist 

Atlanta Regional Outlook 17 First Quarter 2000 
Regional Perspectives
 

Regional Perspectives
 

•	 Despite the near record length of the nation’s current economic expansion, overbuilding, weather-related 

property losses, and continued challenges to established industries could jeopardize future strong growth in 

the Atlanta Region. 

•	 Development of new industries is contributing to the Atlanta Region’s strong growth but also may result in 

new risks to local economies as income and employment levels may be more closely linked to the national 

business cycle. 

•	 Several factors, including supply and demand, may have coalesced to foster a suitable environment for de 

novo banking activity in the Atlanta Region. It is likely that the crucial period in the life cycle of a de novo 

bank, as it matures into an established bank, extends beyond the first three years of operation until it experiences its first recession. 

Region’s Economic and Banking Conditions 

Economic Growth in the Atlanta Region 

Continues, but Risks Persist 

The Atlanta Region economy remains strong as the 

nation’s expansion approaches record length; however, 

setbacks in new and traditional industries could jeopardize the Region’s continued growth. Historically low 

interest rates and inflation, high levels of consumer 

confidence, and strong job and real-income growth 

have combined to support consumer spending, which accounts 

for two-thirds of the nation’s 

economy. In the Atlanta Region, 

even stronger economic growth 

has been fueled by continued 

corporate expansion and relocation and above-average levels of 

population growth. Rapid gains 

in the economy, however, pose unique challenges. 

Development of new industries can result in new risks 

to local economies. Construction activity in highgrowth areas, if not controlled, could lead to overbuilding. Recent development in coastal areas could increase 

the risk of exposure to hurricanes. These risks exist 

side by side with the perennial threats to areas dependent on more traditional types of industry, such as coal 

mining and apparel manufacturing. Consequently, as 

the expansion enters its ninth year, the Atlanta Region is 

not without risk. 

Losses in Alabama’s Textiles and Apparel 

Industries Continue, but Growth in 

Commercial Real Estate Poses Its Own Risk 

While losses in manufacturing, primarily in textiles and 

apparel, have weakened Alabama’s economic performance throughout 1999, stronger growth in some urban 

areas in the state’s northern half continues to support 

demand in the construction industry. Birmingham 

accounted for nearly half of all new commercial construction starts in Alabama during the first half of 1999, 

up from just over 25 percent during the same period one 

year earlier. Commercial construction reached record 

levels in Huntsville in 1998 while Tuscaloosa saw high 

levels of building earlier in the decade. 

Local banks with less than $1 billion in assets are 

actively involved in development activity in these metropolitan areas. Birmingham, after Atlanta, had the 

highest level of construction and development (C&D) 

lending in the Atlanta Region in third quarter 1999. 

Three financial institutions with C&D loans as a share 

of total assets greater than 10 percent account for nearly half of this type of lending. In Huntsville and 

Tuscaloosa as well, the share of C&D lending is considerably higher than the Region’s average. Looking 

ahead, any retrenchment in real estate markets could 

more adversely affect those institutions with higher concentrations of construction lending. 

Atlanta Regional Outlook 18	 First Quarter 2000 
Regional Perspectives
 

Florida’s Economic Growth: 

It’s Not Just Tourism and Citrus 

Florida’s economy continues to change, as reflected by 

the high-tech industry’s growing importance to the 

economy, with telecommunications and biomedical 

manufacturing the predominant growth sectors. Hightech growth has been strongest in the Orlando area, 

where it is now the largest industry, after tourism, in 

terms of employees. Lockheed Martin, with 15,000 

employees, is second to Disney as Orlando’s largest private employer. Access to roadways, distribution channels, warehousing space, and a large international 

airport have attracted high-tech companies to the area. 

High tech also is a large and growing industry in the 

Tampa area, where 23 percent of the state’s biomedical 

manufacturing is based. 

While high tech has been a source of growth, it may 

introduce Florida to new types of risk. South Florida 

increasingly is becoming exposed to new risks as it continues to evolve into a major international telecommunications gateway between the United States and Latin 

America. Companies such as AT&T and Siemens 

Information and Communication Networks, Inc., are 

making sizable investments in high-speed, high-volume 

services to major corporate clients in Latin America. 

Likewise, midsize and small companies are becoming 

involved in business opportunities with clients eager to 

rebuild economies weakened by the recent Latin American crisis. Many of these smaller companies, in particular, may be subject to the economic volatility that 

historically has existed in Latin American countries. As 

the state grows increasingly interconnected with international economies, exposure to global financial developments correspondingly rises. Banks providing 

funding for expansions in international ventures may 

want to exercise caution in this volatile sector. 

Rapid Growth in Atlanta Continues to Fuel 

Demand in the Retail Real Estate Market 

Retail construction in Atlanta continues to expand 

rapidly as residents migrate to the metropolitan area. 

Concern about overbuilding, suburban sprawl, and lack 

of workers, however, may threaten the absorption of 

retail inventory. Most attention in Atlanta’s retail real 

estate markets during 1999 has focused on the construction of two mega-malls—the 1.7-million-squarefoot Mall of Georgia, which opened in August 1999, 

and the 1.2-million-square-foot Arbor Place Mall, 

which opened just two months later in Douglas County. However, the increase represents just 30 percent of 

the total retail starts in Atlanta during 1998. Over 5 million square feet of starts got under way during the first 

half of 1999. Several million square feet remained in the 

planning stages as of September 1999, including construction for a third mall, with an additional 1.2 million 

square feet of space. Both the Mall of Georgia and 

Arbor Place Mall will likely serve as hubs for other surrounding retail construction. Slower economic growth 

or lack of labor may constrain absorption of new space 

in the future. 

Slower-than-anticipated absorption of retail real estate space 

could have consequences for community banks in the Atlanta metropolitan area, whose C&D loan 

exposure, as a share of total assets, 

remains the highest in the Region 

at 12.9 percent. In third quarter 

1999, community banks’ total 

C&D loan portfolio stood at $1.57 

billion, which accounted for 21 

percent of all C&D lending in the 

Atlanta Region. Nineteen financial institutions headquartered in the metropolitan area have C&D loans that 

account for more than 20 percent of total assets. While 

most of the C&D lending is for residential construction 

purposes, a slowing in the area’s real estate markets 

could pose risks to community banks with concentrations in this type of lending. 

Hurricane Damage Expected to Have 

Significant Impact on the North Carolina 

Economy 

Hurricane activity could pose substantial risks to the 

increasingly developed areas along the coastal sections 

of Florida, Georgia, Alabama, the Carolinas, and Virginia (see Atlanta Regional Outlook, Fourth Quarter 

1997). For example, eastern North Carolina will likely 

feel the lingering effects of damage caused by hurricanes Dennis, Floyd, and Irene for several years to 

come. Losses from these storms are expected to top $5 

billion, which would exceed the destruction caused by 

Hurricane Fran in 1996. According to William M. Gray 

Atlanta Regional Outlook 19 First Quarter 2000 
Regional Perspectives
 

and other researchers at Colorado State University 

(CSU), a “moderate” hurricane season can be expected 

in 2000, with 11 named storms, seven hurricanes, and 

three intense hurricanes predicted. However, CSU 

researchers anticipate that the Atlantic Ocean/ 

Caribbean Sea is entering an era of greater storm activity. Furthermore, the economic growth of the past 

several years increases the number of developed properties that potentially lie in the path of hurricanes. Rising deductibles and inadequate insurance coverage 

could result in increased exposure in many areas prone 

to hurricane damage. 

The Tug-of-War between New and Old 

Industries in South Carolina Continues 

South Carolina’s industrial mix continues to shift. 

Automotive-related manufacturing now has a presence 

in nearly three-quarters of the state’s counties and has 

created more than 30,000 new jobs over the past decade, 

making this industry the fourth largest in the state. 

Despite the rapid growth in automotive-related production, however, South Carolina’s economy continues to 

be dominated by the textile and apparel industries, 

which employed almost 100,000 in 1998. Increasing 

overseas competition, demographic shifts, and 

increased use of automation have accelerated job losses 

in textiles and apparel. Shifts in South Carolina’s industrial mix may affect how its economy interacts with the 

national business cycle and global economic shocks. 

High-Tech Development 

in Virginia Fuels Growth 

High-tech telecommunications development is helping 

to propel Virginia’s economy forward. In November 

1999, analysis conducted by the Wall Street Journal 

cited Virginia, which has dubbed itself Silicon Dominion, as one of the hottest spots in the nation for hightech development. Many other states are aggressively 

recruiting high-tech industries, which may limit the 

opening of new manufacturing plants or corporate 

relocation to Virginia. Moreover, high-tech development may not always be the permanent economic 

panacea for which states hope—a fact to which Massachusetts could attest, given its experience during the 

1980s. In Massachusetts, a high concentration of large 

employers in one segment of the industry was decimated by a rapid shift from minicomputers to network 

PCs in the business environment. Closer to home, 

Motorola’s on-again, off-again chip plant construction 

in Goochland was postponed in late November 1999 

for at least another year. As a 

result, the rapid pace of growth 

in the area’s high-tech sector, 

funding for high-tech development, supporting industries, and 

surrounding real estate development may be particularly vulnerable if the industry suffers a 

downturn. 

West Virginia Coal Update— 

Recent Court Ruling 

A recent legal ruling could negatively affect the coal 

industry and economic growth in the state. In late October 1999, the Southern West Virginia U.S. District Court 

imposed a ban on valley in-fills, usually associated with 

mountaintop mining. Dana Waldo, president of the governor’s West Virginia Roundtable, recently warned that 

the ban would adversely affect mining beyond mountaintop operations since it affects valley in-fill from all 

types of mining (mountaintop, surface, and underground mining). Coal miners account for approximately $2 billion, or 20 percent, of the state’s payroll, and are 

among the state’s highest-paid industrial workers. On 

average, mining wages are $50,000 annually, compared 

with the average West Virginia nonmining wage of 

about $25,000. Mines operate in 33 counties, but every 

county in the state is affected either directly or indirectly by the prosperity of the industry. Consequently, legal 

developments affecting the coal industry can have significant ramifications for local communities and their 

lenders, and deserve close monitoring. 

Atlanta Regional Outlook 20 First Quarter 2000 
Regional Perspectives
 

De Novo Banking in the Atlanta Region
 

Although the 1990s often have been characterized as an 

era of bank consolidation, mergers, and acquisitions, 

new commercial banks continue to be chartered at a 

growing rate in the Atlanta Region. More banks were 

chartered during the first three quarters of 1999 than 

during any year since the previous cyclical peak in 

1988 (see Chart 1). Moreover, the issue of de novo1 

banking is of particular importance to this Region, 

which is home to 25 percent of the nation’s institutions 

chartered since 1992. Several factors, such as supply 

and demand, may have coalesced to foster a suitable 

environment for de novo banking activity. This analysis 

looks at economic factors that may have fostered the 

resurgence of de novo banking in the Region during the 

1990s and scrutinizes the examination and failure performance of de novo banks that were chartered during 

the 1980s. 

The Demand-Side View:
 

De Novo Banking and Economic Growth
 

Banking is like other services provided by an economy: 

As the market expands, so does the demand for 

1 While the common usage of the term “de novo” refers to a bank during its first three years of operation, a de novo bank is defined for purposes of this discussion as a new commercial bank that has not 

experienced an economic recession, but excluding any new opening 

for special-purpose entities or those resulting from mergers and 

acquisitions or intercompany reorganizations. 

CHART 1 

New Insured Institution Openings in the Atlanta

 Region Exhibit a Cyclical Pattern and Are

 Nearing the Last Cycle Peak 

30 New Insured Institution Openings 

25 4th-Quarter Moving Average 

20 

15 

10 

5 

0 

1Q 1Q 1Q 1Q 1Q 1Q 1Q 1Q 1Q 1Q 1Q 1Q 1Q 1Q 1Q 1Q 

’84 ’85 ’86 ’87 ’88 ’89 ’90 ’91 ’92 ’93 ’94 ’95 ’96 ’97 ’98 ’99 

Note: New institution openings exclude special-purpose entities and openings 

resulting from mergers and acquisitions and intercompany reorganizations. 

Source: Bank Call Reports 

financial services. One way to measure market expansion is through population increases. During the 1990s, 

the number of residents in the Atlanta Region has 

increased by over 5 million, raising the Region’s share 

of the nation’s population from 16.7 percent in 1990 

to 17.3 percent in 1998. During the 1990s, there 

appears to be a strong relationship between aggregate 

population growth and the formation of de novo banks 

at the county level. This relationship can be seen in 

Map 1, which is an overlay of de novo bank openings 

and population changes. Since the recession of 

1990/91, most economic growth has occurred in metropolitan areas in the Atlanta Region, a fact that correlates with de novo banking activity. Specifically, over 

this period, 193 new commercial banks have opened in 

the Atlanta Region, with 152 (79 percent) opening in 

metropolitan areas. 

Urban areas that have experienced the largest absolute 

increase in population also have seen the greatest levels 

of de novo bank activity. This correlation makes sense 

intuitively because, even if a small urban area experiences a high population growth rate, the absolute 

increase in population might not create enough density 

or critical mass to support an expansion of local banking services. The most active urban markets for new 

openings are Atlanta, numerous urban areas in Florida, 

and urban centers along the I-85/40 corridor in South 

Carolina and North Carolina. Table 1 (next page) lists 

the most active metropolitan areas for de novo banking. 

MAP 1 

De Novo Activity Tends to Occur in Urban Areas 

with Large Population Increases 

Charlotte Change in Population 

(000s), 1991–1998 Greenville –38 to 0 

Atlanta 0 to 5 

5 to 25 

25 to 214 

Raleigh 

Jacksonville DeNovo Openings, 

1991-1998 

Tampa Daytona 05 9 

Beach 

Naples 

Sources: Bureau of the Census (Haver Analytics) and Bank Call Reports 

Atlanta Regional Outlook 21 First Quarter 2000 
Regional Perspectives
 

TABLE 1 

Markets Where a Large Percentage of De Novo Banks1 Have Opened 

Relative to Existing Banks since 1994 

DE NOVO ESTABLISHED DE NOVO TO 

HEADQUARTERS LOCATION COUNT BANK COUNT ESTABLISHED % 

ATLANTA MSA 26 55 47.3 

TAMPA-ST. PETERSBURG-CLEARWATER MSA 10 27 37.0 

GREENVILLE-SPARTANBURG-ANDERSON MSA 7 13 53.8 

NAPLES MSA 7 4 175.0 

SARASOTA-BRADENTON MSA 7 10 70.0 

GREENSBORO-WINSTON SALEM-HIGH POINT 6 8 75.0 

FORT MYERS-CAPE CORAL MSA 5 2 250.0 

DAYTONA BEACH MSA 5 4 125.0 

JACKSONVILLE, FL, MSA 5 7 71.4 

FORT LAUDERDALE PMSA 5 10 50.0 

CHARLOTTE-GASTONIA-ROCK HILL MSA 5 14 35.7 

ORLANDO MSA 5 16 31.3 

ALL OTHER ATLANTA REGION MSAS 60 296 20.3 

ALL ATLANTA REGION MSAS 153 466 32.8 

ALL ATLANTA REGION NONURBAN BANKS 37 505 7.3 

All Atlanta Region Banks 190 971 19.6 

MSA = metropolitan statistical area 

1 Includes only new commercial bank openings from 1994 through third quarter 1999 and excludes any new openings 

for special-purpose entities or those resulting from mergers and acquisitions or intercompany reorganizations. 

Source: Bank Call Reports 

Metropolitan areas that experienced more modest 

increases in population also experienced lower levels of 

de novo banking. Given the apparent strong relationship 

between the increase in population and greater de novo 

banking activity, it appears that for new bank charters to 

occur, favorable market growth conditions (the demandside argument) likewise may need to exist. 

The Supply-Side View: De Novo Banking 

and Mergers and Acquisitions 

Demand-side factors, such as increases in a population 

or improvement in its financial well-being, may not be 

the only contributors to de novo banking activity— 

supply-side forces also may play a determining role. 

One such factor, often cited by industry analysts, is the 

effect of mergers and acquisitions (M&As) within the 

industry on the incidence of new bank chartering. When 

a local financial institution is absorbed, management 

and board members who do not transfer to the acquiring 

bank may see market opportunities for seeking a new 

charter. Their resources include preexisting relationships with the acquired bank’s clientele, intimate knowledge of local economic conditions, and, in many cases, 

a ready pool of capital that was received in the sale from 

the acquirer. 

While the impact of M&A activity on the resurgence in 

de novo openings has received significant press coverage, it does not seem as strong as the effects of population and income. (See Map 2, which is an overlay of de 

novo openings and M&A activity at the county level.) 

While there is some equivalence between births and 

deaths of institutions in counties within urban areas, 

this relationship is less clear in rural counties. Hence, it 

appears that supply-side forces—displaced management and available capital pool—manifest to form a 

new bank when demand-side forces are favorable. 

Consistent with this view, a recent study by the FDIC’s 

Division of Research and Statistics2 concluded that the 

2 Seelig, Steven A., and Timothy Critchfield, “Determinants of De Novo 

Entry in Banking,” FDIC Division of Research and Statistics, 1999. 

Atlanta Regional Outlook 22 First Quarter 2000 
Regional Perspectives
 

relationship between out-of-market M&As and new 

bank formation in certain markets may not be as strong 

as previously thought. 

De Novo Banks in the 1980s and 1990s 

The number of de novo banks in the Atlanta Region has 

risen substantially since 1993. Thus far in 1999, the 

number of de novo banks has reached the highest level 

since the previous peak of 80 in 1988. Moreover, the 

four-quarter moving average continues to increase, as 

seen in Chart 1 (page 21). Although the current cyclical 

upswing in de novo openings is similar to the trend 

experienced in the 1980s, there are differences between 

the two periods. First, the number of new financial institutions chartered during the current expansion falls far 

below the number chartered in the 1980s. Since the end 

of the 1990/91 recession, 198 de novo banks have 

opened in the Atlanta Region. From the 1982/83 recession to the beginning of the 1990/91 recession, 377 de 

novo banks opened. Second, the market location of de 

novo banks in the 1990s differs from that of the 1980s. 

While the Atlanta and the Tampa-St. PetersburgClearwater metropolitan areas were the most active 

areas for new openings during both periods, the volume 

is lower during this cycle. Urban areas along the I-85/40 

corridor in South Carolina and North Carolina and in 

other urban areas in Florida such as Naples, Daytona 

MAP 2 

Some Correlation May Exist between
 

M&A1 and De Novo Activity in Urban Areas
 

M&A Events, 

1991–98 

0 9 18 

DeNovo Openings, 

1991–98 

0 5 9 

1 M&A=merger and acquisition; banks headquartered in a county that have 

participated in absorption, consolidation, or merger activity. 

Source: Bank Call Reports 

Beach, and Jacksonville, are experiencing increased 

activity in this cycle. The most active markets in the current period can be seen in Table 1. 

De Novo Banks of the 1980s Performed 

Poorly during the Last Recession 

De novo banks that opened from 1984 through 1991 

performed poorly relative to established commercial 

banks3 during the recession of 1990/91. Banks formed 

after the 1982/83 recession were much more likely than 

established banks to receive a “poor” examination rating4 or fail. As seen in Chart 2, the percentage of poorly rated de novo banks was generally much higher than 

the percentage of poorly rated established banks from 

1985 through 1994. Moreover, at year-end 1991, about 

36 percent of de novo banks received poor examination 

ratings compared with 22 percent of established banks. 

The performance of de novo banks was markedly worse 

in urban areas than in rural areas. Nearly 40 percent of 

new banks in urban areas were poorly rated compared 

with 21 percent of new banks in rural areas. Greater 

competition contributed to the higher rate in urban areas. 

Although an established urban bank was more likely to 

receive a poor examination rating than an established 

3 For purposes of this analysis, established commercial banks are 

those eight years old and that opened before January 1, 1983. 

4 A “poor” examination rating is a Uniform Bank Rating of 3, 4, or 5. 

There is some survivorship bias in the figures as new banks or established banks that failed prior to year-end 1991 are not included, but 

they would likely have had a poor examination rating. However, the 

survivorship bias would have a greater effect on the new-bank group 

because of the smaller size and would increase the contrasting performance relative to established banks. 

CHART 2 Percentage of Banks with a Poor Examination Rating 

A Greater Percentage of De Novo Commercial 

Banks1 than Established Banks in the Atlanta 

Region Had a Poor Examination Rating2 

throughout Most of the Last Economic Cycle 

1 “De novo” includes all new commercial bank openings from 1984 through 1991 

and excludes any new openings for special-purpose entities or those resulting from 

mergers and acquisitions or intercompany reorganizations.

2 Poor examination rating is an assigned Uniform Bank Rating of 3, 4, or 5. 

Sources: Bank Call Reports, FDIC Examination Database 

’85 0 

10 

20 

30 

40 De Novo Commercial Banks 

Established Commercial Banks 

Recession 

from August 1990 

through April 1991 

’86 ’87 ’88 ’89 ’90 ’91 ’92 ’93 ’94 

Atlanta Regional Outlook 23 First Quarter 2000 
Regional Perspectives
 

rural bank, the difference was not as pronounced as in CHART 3 

the new bank group (see Table 2). 

De novo banks of the 1980s failed at a significantly 

higher rate than did established banks. Over a ten-year 

period from 1984 through 1993, 56 commercial banks 

failed in the Atlanta Region. Of the total, 26 were de 

novo banks that ceased operation around the economic 

downturn of 1990/91. The failure rate among de novo 

banks at year-end 1991 was 7 percent compared with 

only 2.6 percent among established banks. 

Additionally, de novo banks, chartered in the 1980s, 

that were open three years or longer were more likely to 

receive a poor examination rating after experiencing 

their first economic recession. This is illustrated in 

Chart 3, as a greater percentage of new banks open 

three years or longer had a poor examination rating at 

year-end 1991. Moreover, the likelihood of having a 

poor examination rating increased with the length of 

operations as a poor rating was received at 52 percent of 

new banks that were open between six and eight years. 

This significant difference in examination performance, 

depending on the age of the de novo bank, was consistent in all of the Region’s major urban markets and rural 

areas. It is likely that this difference derives from the 

innate life cycle of a de novo bank.5 Typically, new 

banks grow assets very rapidly and suffer operating 

losses during the early years of their life cycle. In 

response, regulatory authorities typically require a min5 For further discussion see DeYoung, Robert, “Birth, Growth, and 

Life or Death of Newly Chartered Banks,” Economic Perspectives, 

Federal Reserve Bank of Chicago, Third Quarter 1999. 

TABLE 2 

Poor Examination Ratings1 Appear Related to 

the Length of Operation of Urban De Novo Banks2 

Opened Prior to the 1990–91 Recession 

100 

80 

60 

40

Percentage 

15% 23% 

37% 45% 45% 

61% 

48% 

20 

0 

1 2 3 4 5 6 

Years in Operation 

7 8 

Well-Rated Banks Poorly Rated Banks 

1 “De novo” includes all new commercial bank openings from 1984 through 1991 

and excludes any new special-purpose entities or openings resulting from mergers 

and acquisitions or intercompany reorganizations. 

2 Poor examination rating is an assigned Uniform Bank Rating of 3, 4, or 5. 

Sources: Bank Call Reports, FDIC Examination Database 

imum amount of capitalization to assimilate the rapid 

asset growth and absorb operating losses and impose 

higher capital ratios for new banks during their first 

three years of existence. Generally, after three years 

these capital restrictions are eased and a typical de novo 

bank will leverage its equity to the same degree as a 

well-managed established bank to improve return on 

capital. The ability of a new bank to deploy its capital 

fully after three years when paired with a loan portfolio that usually has a higher percentage of unseasoned 

loans contributes to the poorer performance of new 

banks relative to established banks. It is likely that the 

crucial period in the life cycle of a de novo bank, as it 

matures into an established bank, extends beyond the 

first three years of operation until its first experience of 

a recession. 

Comparison of Poorly Rated Banks between Urban and Nonurban 

De Novos1 and Established Banks in 19912 

DE NOVOS ESTABLISHED BANKS 

% WITH A % WITH A 

POOR POOR 

EXAMINATION EXAMINATION 

HEADQUARTERS LOCATION COUNT RATING3 COUNT RATING3 

ALL ATLANTA REGION MSAS 293 39.6 539 29.9 

ALL ATLANTA REGION NONURBAN BANKS 70 21.4 633 15.5 

All Atlanta Region Banks 363 36.1 1,172 22.1 

MSA = metropolitan statistical area
 

1 Includes only new commercial bank openings from 1984 through 1991 and excludes any new openings for 


special-purpose entities or those resulting from mergers and acquisitions or intercompany reorganizations.
 

2 Includes only banks for which an examination rating exists.
 

3 Banks with an assigned Uniform Bank Rating of 3, 4, or 5.
 

Sources: Bank Call Reports, FDIC Examination Database
 

Atlanta Regional Outlook 24 First Quarter 2000 
Regional Perspectives
 

Issues to Watch in De Novo Banking 

As the experience of the 1980s clearly demonstrates, de 

novo banks are more susceptible to economic downturns than established banks. A new bank that had not 

been recession tested was about twice as likely as an 

established bank to receive a poor examination rating 

or fail. At third quarter 1999, 203 de novo institutions, 

or 15.2 percent of the Atlanta Region’s financial institutions, which hold $11.1 billion in assets, have never 

experienced the effects of a recession. Also, as seen in 

Table 1 (page 22), the ratio of de novo banks to established banks is becoming very high in some of the 

Region’s fastest-growing urban areas. It is unclear how 

new banks will affect competition and profitability in 

these areas, and it is uncertain how these markets will 

be affected in a recession. Ultimately, de novo banks in 

these fast-growing urban areas may be vulnerable during an economic downturn. Recognizing this vulnerability, management of new banks should be aware of 

the greater risks that are innate in the early life cycle of 

a de novo bank and how changes in the economy could 

affect their institutions. 

Atlanta Region Staff 

Atlanta Regional Outlook 25 First Quarter 2000 
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