Regional Outlook
 

FEDERAL DEPOSIT INSURANCE CORPORATION	 SECOND QUARTER 1999 

FDIC
 

Memphis
 

Region
 

Division of
 

Insurance
 

Gary L. Beasley,
 

Regional Manager
 

Robert L. Burns,
 

Senior Financial
 

Analyst
 

F. Miguel Hasty,
 

Financial Analyst
 

In Focus This Quarter 

◆ Economic Conditions and Emerging Risks in Banking—This article 

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

primary focus on potential risks to insured depository institutions. 

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

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

the U.S. economy. See page 3. 

●	 Trends Affecting Banking Lines of Business—Although credit conditions 

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

Consumer Lending—Continued high consumer loan loss rates raise questions 

about how lenders will fare under less favorable economic circumstances. 

See page 8. 

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

corporate sector showed signs of stress. See page 9.
 

Commercial Real Estate and Construction Lending—Selected metropolitan
 

markets are experiencing rapid commercial development despite declining
 

indicators of demand. See page 10.
 

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

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

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

See page 12. 

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

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

insured institutions is increasing. See page 13. 

By the Analysis Branch Staff 

Regional Perspectives 

◆ Region’s Economic and Banking Conditions—Employment growth in 

the Region slowed throughout 1998 and is likely to remain slow in 1999 because of 

continuing tight labor markets, the potential for slowing real estate construction, 

and the cumulative effects of slowing world economies. Financial institutions 

reported generally healthy conditions, although earnings performance continues to 

be hampered by declining net interest margins. See page 16. 

◆ Effects of Global Weakness in the Region Are Evident in Lower Commodity Prices—Many farm commodity prices fell dramatically in 1998, eroding 

some farmers’ financial positions and resulting in an increase in past-due agricultural loans. Concerns over the asset quality of agricultural lenders could rise if the 

outlook for continued low prices in 1999 materializes. The energy, timber, and primary metals sectors in the Region also have been affected by weaker worldwide 

demand. See page 19. 

By the Memphis Region Staff 

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

Insurance Corporation for the following eight geographic regions: 

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

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

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

Dallas Region (CO, NM, OK, TX)
 

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

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

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

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

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

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

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

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

Region’s Regional Outlook, please call Gary Beasley at (901) 821-5234 or send an e-mail to 

gbeasley@fdic.gov. 

The views expressed in the Regional Outlook are those of the authors and do not necessarily reflect 

official positions of the Federal Deposit Insurance Corporation. Some of the information used in 

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

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

the Federal Deposit Insurance Corporation. 

Chairman Donna Tanoue 

Director, Division of Insurance Arthur J. Murton 

Executive Editor George E. French 

Editors Lynn A. Nejezchleb 

Maureen E. Sweeney 

Publications Manager Teresa J. Franks 
In Focus This Quarter
 

Economic Conditions and
 

Emerging Risks in Banking
 

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

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

indicators of bank performance. 

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

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

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

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

potential for stress among insured institutions is being monitored. 

Economic Developments
 

Conditions Have Improved Markedly 

since Late 1998 

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

about the durability of the expansion amid the late-1998 

financial market turmoil, the economic outlook since 

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

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

between September and November helped to support 

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

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

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

Consumer Spending and Business Investment 

Are Key to Economic Strength 

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

economy currently register values associated with the 

best macroeconomic conditions in our history. Growth in 

real gross domestic product (GDP) was 3.9 percent for 

all of 1998—the third consecutive year in which growth 

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

million jobs during 1998, while unemployment averaged 

just 4.5 percent, the lowest annual figure since 1969. 

Despite this robust economic activity, inflation was also 

the lowest in a generation. Consumer prices rose by just 

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

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

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

percent—the best performance since 1972—while unit 

labor costs of businesses rose by only 1.9 percent. 

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

has actually accelerated during the current expansion 

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

responsible for this investment boom. One is the need 

for producers to invest in new technologies in order to 

cut costs and remain competitive. Also, rising stock 

prices, low interest rates, and low yield spreads during 

the past few years have helped keep the cost of capital 

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

real GDP has come from investment in producers’ 

durable equipment, versus approximately 10 percent 

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

1980s. Bank commercial and industrial lending has 

expanded at an average annual rate of 10.6 percent over 

the past five years, largely on the strength of business 

investment spending. 

The underlying factors that drive consumer spending 

are strong. Low unemployment and rising real incomes 

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

CHART 1 

Low Interest Rates and High Stock Prices
 

Fuel Consumption and Investment
 

Personal Consumption Investment in Producers’ 

Expenditures* (%) Durable Equipment* (%) 

20 9 

15 7
 

5
 10 

3 5 

1 

0 –1 

–5 –3
 

–5
 –10 

* Annual Inflation-Adjusted Rate of Change 

Source: Bureau of Economic Analysis 

1990–91 

Recession 

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

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

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

completed during 1998—the highest level in ten 

years—while a record 4.8 million existing homes were 

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

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

refinancing their mortgages during 1998.1 

Although real disposable personal income grew by 

more than 3 percent during 1998, personal savings was 

essentially zero during the fourth quarter. This was the 

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

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

CHART 2 

Housing Starts and Home Sales Reflect the 

Strength of the Consumer Sector 

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

2,250 

2,750 

3,250 

3,750 

4,250 

4,750 

5,250 

5,750 

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

One-Unit 

Housing 

Starts (000’s) 

550 

650 

750 

850 

950 

1,050 

1,150 

1,250 

1,350 

1,450 

1990–91 Recession 

Existing 1- to 

4-Family 

Sales (000’s) 

lowest rate of personal savings recorded in the United 

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

consumer credit quality. Most analysts have argued for 

the importance of a “wealth effect” from rising stock 

values on consumer spending.2 They note that although 

consumers are saving little out of current income, 

household wealth continues to grow rapidly, driving 

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

and in supporting the economies of countries around the 

world that depend on exports to the United States. This 

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

analysts to voice concerns that the wealth effect might 

reverse itself, leading to a sharp drop in consumer 

spending if there is a sustained stock market decline. 

Conditions Vary across Industry Sectors 

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

certain sectors have been undergoing significant strain 

because of low commodity prices and weak foreign 

demand. 

Commodity price weakness extends across a wide range 

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

Among agricultural commodities, grain prices have 

fallen substantially from their record-high levels of just 

three years ago, while prices for hogs and soybeans have 

also been under severe pressure. Industrial commodity 

prices have fallen sharply, with steel prices down by 

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

industrial chemical benzene has fallen by 40 percent 

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

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

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

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

savings either through a reduction in disposable income or through 

increased consumption outlays. Tax payments resulting from capital 

gains will reduce measured disposable personal income. Increasing 

household wealth may lead to higher consumption outlays by means 

of the wealth effect. 

Memphis Regional Outlook 4 Second Quarter 1999 
0 

In Focus This Quarter
 

CHART 3 

Price Weakness Extends across 

a Wide Range of Commodities 

Percent Decline in Prices from January 1997 to March 1998 

All 

commodities* Tin Steel Wheat Benzene Crude Oil 

–5 

–5.3%
 

–10
 –7.7%
 

–15
 

–20
 

–25
 

–30 –29.1%
 

–35
 

–36.2%
 –40
 

–40.6%
 –45
 

–50
 –47.4% 

* Producer Price Index (PPI)
 

Source: Journal of Commerce, Bureau of Labor Statistics
 

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

next several months. 

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

inflation has taken root both in developed nations and in 

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

that was evident during the 1970s. Low inflation has 

also made it difficult for manufacturing firms to raise 

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

large-scale investment in plant and equipment during 

the 1990s in both developed and emerging countries has 

added vast amounts of new global manufacturing 

capacity, making industrial overcapacity a source of 

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

have taken place in Asia, Eastern Europe, and Latin 

America have reduced global demand for commodity 

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

less price competitive abroad because of the relative 

strength of the dollar. 

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

resilient in the face of weakness in the manufacturing 

sector is that firms have been able to restructure to cut 

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

driving force behind the record number and dollar value 

of merger deals announced during 1998. Mega-mergers 

involving Exxon-Mobil and Daimler Benz-Chrysler 

helped push the dollar volume of mergers announced in 

1998 to almost $1.2 trillion—nearly double the level 

announced in 1997 and far greater than any year during 

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

U.S. Foreign Trade Reflects Recent Turmoil 

in the Global Economy 

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

its overall growth. Between 1994 and 1997, export 

growth contributed about 1 percentage point each year 

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

of the Asian economic crisis in 1997, the export sector 

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

activity. During the first three quarters of 1998, exports 

decreased at an annualized rate of 4.4 percent, led by 

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

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

goods and services during most of 1998. Declining 

goods exports and rising imports combined to push the 

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

during 1998—a 50 percent increase from the year 

before. The trade deficit continued to increase in early 

1999. Data for January show an imbalance of nearly 

$17 billion, the largest monthly deficit ever recorded. 

Despite the weakness in foreign demand that was 

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

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

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

CHART 4 

0 

1,000 

2,000 

3,000 

4,000 

5,000 

6,000 

7,000 

8,000 

9,000 

0 

200 

400 

600 

800 

1,000 

1,200 

1,400 

Deal Value 

(Billions $) 

(Columns) 

Number of 

Deals (Line) 

Source: Houlihan Lokey’s Mergerstat 

Pressure to Maintain Profit Margins 

Has Led to Record Merger Activity 

Recessions 

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

Memphis Regional Outlook 5 Second Quarter 1999 
In Focus This Quarter
 

quarter. This unexpected increase in U.S. exports 

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

product types, with the greatest increase in activity 

observed in capital goods. 

The Outlook for the Global Economy 

Remains Uncertain 

Developments during the past six 

months have resulted in an 

improved outlook for the global 

economy, but some key uncertainties remain. While the global 

financial system is more stable 

today than it was six months ago, 

some of the world’s most important economies either 

remain in recession or are experiencing slower growth. 

In this environment, the potential remains for shocks to 

arise in the global economy that could adversely affect 

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

quality of insured depository institutions. 

Canada. The Canadian economy is healthier than at any 

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

expected to track overall growth in the United States, in 

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

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

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

producers and for local economies closely tied to these 

commodities. 

Mexico. Mexican GDP growth was 4.6 percent in 1998, 

reflecting relatively strong employment and wage gains, 

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

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

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

year. The Blue Chip Economic Indicators consensus 

forecast calls for real GDP growth of 2.9 percent during 

1999, down from 4.6 percent in 1998. 

Western Europe. Europe’s problems are similar to 

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

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

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

to weakness in export markets. German GDP shrank by 

0.4 percent during the fourth quarter of 1998, while 

unemployment remains above 10 percent. In response to 

signs of growing weakness in Germany and other major 

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

basis points to 2.5 percent on April 8, 1999. 

Eastern Europe. Much of Eastern Europe is faced with 

slow growth or recession following the devaluation of 

the ruble and the default on Russian government debt in 

August 1998. The Russian economy shows few signs of 

recovery amid high inflation and halting progress in 

economic reform. Poland and Hungary, Eastern 

Europe’s engines of growth before the Russian crisis, 

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

Asian Pacific Rim. The Japanese economy remains 

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

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

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

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

percent in 1999. 

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

Korea, Hong Kong, and Thailand, current accounts have 

moved from deficit to surplus as devalued currencies 

continue to depress imports. Foreign capital is returning 

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

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

the entire region, which ships fully 40 percent of all 

exports to other Asian Pacific Rim nations. 

In China, which has been relatively immune to the worst 

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

forcing economic restructuring. With annual economic 

growth below the targeted 8 percent mark, economic 

planners have been forced to reduce production and 

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

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

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

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

Memphis Regional Outlook 6 Second Quarter 1999 
In Focus This Quarter
 

Latin America. With the apparent stabilization of the 

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

January 1999 has depressed economic activity and 

renewed fears of inflation. Consensus estimates place 

Brazilian economic growth at negative 3.5 percent for 

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

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

Risks Remain despite a Positive 

U.S. Economic Outlook 

Robust economic growth, low inflation, and stable 

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

If this outlook actually comes to pass, we can expect 

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

Despite this positive outlook, the risk remains that the 

expansion could be derailed by one of three types of 

shocks. The first would be a resurgence of inflation 

resulting from demand-induced shortages of labor or 

other key economic resources. Although inflation has 

been consistently low in recent years, investors remain 

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

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

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

The second type of shock that could end the expansion 

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

devaluations on U.S. import prices. Although these 

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

rates low, at some point they could impose a heavier 

burden on U.S. businesses by shrinking revenues and 

profit margins, mirroring what has already occurred in 

some commodity-based industries.4 

The third type of shock is financial market instability. 

Consumer confidence, which has reflected recent 

increases in stock market wealth, could tumble in the 

event of a severe and prolonged decline in the stock 

market. Business investment has also depended on the 

support of strong and stable financial markets that offer 

firms access to capital on favorable terms and facilitate 

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

likely produce a disorderly shakeout of troubled firms 

marked by a rise in bankruptcies and loan defaults. 

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

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

ro19982q/sf/infocus2.html. 

Trends Affecting Banking Lines of Business
 

Overview 

Trends in bank and thrift lines of business align closely 

with those of the economy. Most insured institutions 

have prospered during this economic expansion, as 

shown by the industry’s continuing earnings growth, 

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

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

continuing availability of consumer and business credit 

from banks and thrifts. Even during the closing months 

of 1998, when capital market funding sources became 

quite volatile, credit continued to flow from insured 

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

underwriting terms in some cases. 

Although credit conditions appear strong, a number of 

insured institutions’ loan portfolios are shifting toward a 

riskier mix of credits. Underlying reasons for these 

shifts vary, but likely explanations include opportunities 

to earn higher yields and confidence about the overall 

economic outlook. The following paragraphs discuss 

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

institutions. The influence of recent interest rate 

changes and competitive factors on asset/liability and 

credit risk management is also explored. 

Memphis Regional Outlook 7 Second Quarter 1999 
In Focus This Quarter
 

Consumer Lending 

Debt Growth Sustains Consumer Spending but 

Could Contribute to Financial Strains under 

Less Favorable Economic Conditions 

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

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

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

consumer spending. With mortgage debt leading the 

way, consumer loan growth rates accelerated in 1998. 

The key factor driving mortgage loan growth was lower 

interest rates, which encouraged many consumers to 

purchase homes, refinance existing mortgages, and 

consolidate their personal debts through home equity 

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

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

percent and 5 percent, respectively. 

Nonmortgage consumer loan loss rates remain above 

previous recession levels despite the apparent strength 

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

their peak in the fourth quarter of 1997, but remain 

above the rates experienced during the prior recession. 

The chart also shows that consumer credit loss rate 

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

million in 1998.5 The good news for consumer lenders 

is that the growth rate in personal bankruptcies has 

slowed. However, this leveling off does not mean that 

consumer credit quality concerns have abated. The 

overriding concern is how personal bankruptcies and 

consumer credit losses, already at high levels, would be 

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

growth. Since revolving credit card balances typically 

carry higher interest rates than home equity loans, this 

5 Reasons for the rise in personal bankruptcy rates are further 

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

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

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

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

CHART 5 

0.0 

0.5 

1.0 

1.5 

2.0 

2.5 

3.0 

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

0.0 

0.2 

0.4 

0.6 

0.8 

1.0 

1.2 

1.4 

Consumer Charge-Offs and Bankruptcies 

Have Leveled Off at a High Rate 

Bankruptcy Filings 

per 1,000 Population 

(Right axis) 

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

1.6 

Consumer Loan 

Charge-Off Rate (%) 

“reloading” of credit card debt would further strain the 

financial flexibility of consumers. 

High Loan-to-Value Mortgage Products 

and Subprime Lending Transform 

Consumer Lending 

Consumer lending practices have changed significantly 

since the last recession. Because of intense competition 

and declining net interest margins, consumer lenders 

are reaching out to borrowers further down the credit 

quality spectrum and relaxing traditional collateral 

requirements. Bank supervisors have indicated that a 

growing number of insured institutions are involved in 

some form of subprime lending. Subprime loans, 

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

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

interest rates than prime-rate loans and often require 

substantial collateral margins. 

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

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

amount of senior and junior liens against a home 

exceeds its value, are usually made to borrowers with 

“clean” or unblemished credit histories. However, the 

lack of collateral protection results in much higher loss 

experience when a borrower defaults. As Chart 6 shows, 

high LTV loans have had a higher loss rate experience 

(adjusted for seasoning) than either traditional home 

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

Memphis Regional Outlook 8 Second Quarter 1999 
In Focus This Quarter
 

CHART 6 

0 

1 

2 

3 

4 

5 

6 

7 

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

Months since Origination 

High LTV Mortgages* Have a Higher Loss 

Experience than Other Mortgage Types 

Charge-Off Rate (%) 

* Includes home improvement loans 

Source: Moody’s Investor Services 

High LTV 

Subprime 

Traditional 

Home Equity 

have deteriorated as high LTV loans have proliferated.6 

At the same time, recent regulatory surveys of credit 

underwriting practices show easing standards on home 

equity loans.7 The loss experience of these higher risk 

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

Commercial Lending 

Commercial Loan Performance Remains 

Strong but Corporate Financial Strains 

Are Developing 

Continued strength in the corporate sector is reflected in 

the level of corporate bankruptcy filings, which have 

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

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

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

U.S. businesses have benefited from significantly lower 

interest rates and an abundant supply of credit. Credit 

access provided by banks was particularly important to 

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

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

October 2, 1998, p. 3. 

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

Survey of Credit Underwriting Practices” indicated that 33 percent of 

the banks offering home equity loans eased standards, compared with 

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

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

period, sharply higher interest rate spreads on corporate 

bonds8 and commercial paper led many companies to 

tap cheaper funding sources, including existing unused 

credit and commercial paper lines held by commercial 

banks. As a result, commercial banks experienced a 15 

percent (annualized) rate of growth in fourth quarter 

1998, the highest rate of commercial loan growth in 16 

years. 

Although commercial loan loss rates are low, financial 

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

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

quarters. Moreover, growth in bank commercial lending 

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

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

exposure to weak commodity prices and slower export 

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

obligations. For instance, a recent Bank of America 

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

increasingly by borrowers seeking relief from financial 

performance-related covenants.10 Financial strains are 

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

Index indicates that corporate bond spreads over ten-year Treasury 

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

July 1998 to the end of October 1998. 

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

Report, January 25, 1999. 

CHART 7 

0.0 

0.2 

0.4 

0.6 

0.8 

1.0 

1.2 

1.4 

1.6 

1.8 

2.0 

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

Sources: U.S. Courts; Bank Call Reports 

Net Charge-Off Rate (%) Business Bankruptcies 

9,000 

10,000 

11,000 

12,000 

13,000 

14,000 

15,000 

16,000 

17,000 

18,000 

19,000 

20,000 

Domestic Commercial Loan Losses Remain Low 

and Business Bankruptcies Decline 

Memphis Regional Outlook 9 Second Quarter 1999 
In Focus This Quarter
 

also reflected in the level of corporate bond defaults, 

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

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

As Debt Markets Become More Cautious, 

Syndicated Lending Shifts toward Higher 

Risk Borrowers 

Although the longer-term trend has been toward more 

aggressive corporate lending strategies, many insured 

institutions responded to the financial market turmoil in 

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

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

tighter lending terms do not appear to have quelled 

either loan demand or loan production substantially. 

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

occurred in the latter part of 1998, syndicated loans to 

leveraged companies jumped 41 percent to $273 billion 

during 1998. Over the same period, nonleveraged loans 

declined 35 percent to $599 billion. Although corporate 

merger activity accounts for much of the increase in 

leveraged lending volume in 1998, some lenders appear 

to be taking advantage of the higher yields available in 

this market relative to yields on lower risk credits. The 

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

that corporate bond defaults for speculative grade issues 

are trending upward.14 Moreover, trends in corporate 

bond spreads and rating agency actions on corporate 

bond debt suggest a bond market that is becoming 

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

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

March 5, 1998. 

12 See Federal Reserve Board Senior Loan Officer Opinion Surveys 

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

boarddocs/snloansurvey/. 

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

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

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

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

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

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

1.27 percent in 1998. 

CHART 8 

0.4 

0.6 

0.8 

1.0 

1.2 

1.4 

1.6 

1.8 

2.0 

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

–120 

–80 

–40 

0 

40 

80 

120 

160 

200 

Corporate Bond Ratings and Required 

Yields Reflect Greater Market Uncertainty 

Merrill Lynch Corporate Bond 

Master Index Spreads to Comparable

 Maturity Treasuries (bps) 

Sources: Moody’s Investor Service; Merrill Lynch 

Ratio of Corporate 

Upgrades to 

Downgrades 

Commercial Real Estate and 

Construction Lending 

Construction Loan Growth Accelerates 

as Overbuilding Pressures Increase 

in Certain Markets 

In 1998, the value of private commercial construction 

rose 4.0 percent over 1997 levels, reflecting a moderate 

slowdown in growth compared with a compounded 

average annual growth rate of 8.4 percent since 1992. In 

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

11.5 percent in 1998, compared with an annual average 

growth rate of 8.0 percent since 1992. Construction 

loans at insured institutions grew 20 percent in 1998, 

the highest growth rate since 1986.15 

Although market fundamentals are strong throughout 

most major U.S. markets, some metropolitan areas 

appear to be vulnerable to an oversupply of commercial 

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

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

construction in progress in some cases; 3) projections of 

rising vacancy rates by market analysts; and 4) various 

recent shifts in demand indicators. Data through June 

1998 indicate that construction activity in these markets 

15 Construction loan growth captures growth in both residential and 

nonresidential development. 

Memphis Regional Outlook 10 Second Quarter 1999 
In Focus This Quarter
 

has not yet abated to reflect moderating demand levels.16 

Overbuilding concerns may be tempered to the extent 

that tighter commercial real estate lending standards 

slow the pace of development.17 

Loan Underwriting Study Reveals Sounder 

Practices Compared with the 1980s, but Intense 

Competition Forces Some Concessions on 

Pricing and Structure 

Beginning in August 1998, FDIC analysts set out to 

investigate construction loan underwriting practices in 

banks servicing various rapidly growing markets. The 

study identified several differences between today’s 

lending practices and those prevalent during the last 

cycle. Most importantly, today’s lenders are making 

credit decisions on the basis of improved appraisals, 

increased attention to project cash flows and project 

feasibility, and better market information on competing 

projects. However, intense competition has forced an 

across-the-board reduction in loan pricing margins even 

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

The study also identified some instances of aggressive 

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

cash equity requirements, and lending on thin collateral 

margins. Borrowers who secured the most aggressive 

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

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

exposure to project risks are practices often cited in 

conjunction with the heavy construction loan losses 

experienced during the previous real estate downturn. 

Finally, the study found that many real estate investment 

trusts and large corporate developers have been able to 

obtain long-term unsecured financing for development 

purposes. The lack of collateral protection could make 

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

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

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

commercial real estate lenders reacted to market volatility in late
 

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

example, the Federal Reserve Board Senior Loan Officer Opinion
 

Survey for November 1998 and January 1999.
 

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

Agricultural Lending 

Farm Banks Threatened by Falling 

Commodity Prices 

Farm banks generally performed well in 1998, reporting 

a modest increase in nonperforming loans from 1.09 

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

1998. Although delinquent loans rose only slightly 

in the aggregate, farm banks in some localized areas 

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

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

federal banking agencies, which show rising levels of 

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

During 1998, the outlook for significant portions of the 

farm sector deteriorated following a dramatic fall in 

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

soybeans, and hogs fell to ten-year 

lows and were below the economic breakeven cost of production for 

many producers. For areas heavily 

dependent on these commodities, 

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

substantial declines in net cash income from 1999 

through 2003.19 In 1999, the USDA projects farm 

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

year’s level of $48 billion. 

Although current conditions have the potential to cause 

stress for substantial numbers of farm banks in certain 

regions, some significant differences exist between 

today’s circumstances and those that led to the farm 

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

collateral protection. Common covenants include maximum leverage 

ratios, minimum equity requirements, and limits on encumbered 

assets through recourse or cross-collateralization to third parties. 

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

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

to reductions in government payments to farmers. 

Memphis Regional Outlook 11 Second Quarter 1999 
In Focus This Quarter
 

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

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

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

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

farm products and low commodity prices continue for 

the remainder of this year, the condition of farmers 

could deteriorate significantly, increasing financial 

stress at insured farm banks. 

Funding and Interest Rate Risk 

Deposit Funding Becomes 

More Difficult to Obtain 

Competitive pressures in the banking industry are not 

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

largely because of the existence of higher yielding 

investment products. For example, the Investment 

Company Institute reports that net inflows into mutual 

funds have exceeded net increases in deposit accounts 

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

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

loan portfolios have expanded in line with the overall 

growth in the economy. As a result, institutions have 

turned increasingly to other borrowings for funding. 

These trends are captured in Chart 9, which shows that 

the ratio of bank and thrift loans to deposits reached a 

record 88 percent in December 1998. Small community 

CHART 9 

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

assets) are most affected by deposit trends, since they 

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

Interest Rate Changes Pose Asset/Liability 

Management Challenges 

Interest margin pressures are posing challenges for 

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

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

appears to have contributed to a decline in margins to 

their lowest levels since 1991 for both large and small 

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

(longer-term asset holdings funded with shorter-term 

deposits and borrowings), a flatter yield curve results in 

lower spreads between asset yields and interest costs. 

The decline in long-term interest rates during 1998 also 

led to a record volume of mortgage refinance activity, 

as indicated by the Mortgage Bankers Association’s 

Refinancing Index.20 Among many mortgage lenders, 

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

significant increase in overhead as they expanded staff 

to accommodate higher loan application volumes. A 

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

with a modest upward movement in fixed mortgage rates. 

CHART 10 

65 

70 

75 

80 

85 

90 

95 

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

Loans and Assets Are Growing Faster than 

Deposits at Insured Institutions 

Loans to Deposits 

Deposits to Assets 

Source: Bank Call Reports and Thrift Financial Reports 

Percent 

A Flatter Yield Curve in 1998 Placed 

Pressure on Net Interest Margins 

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

1.0 

1.5 

2.0 

2.5 

3.0 

3.5 

4.0 

4.5 

5.0 

–50 

0 

50 

100 

150 

200 

250 

300 

350 

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

Assets 

< $1 Billion 

(right axis) 

10-Year Less 1-Year 

Treasury (bps) 

Mean Net Interest 

Margin (%) 

Assets 

> $1 Billion 

(right axis) 

Memphis Regional Outlook 12 Second Quarter 1999 
In Focus This Quarter
 

longer-lasting impact involves the shift in borrower 

preferences toward fixed-rate mortgages. According to 

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

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

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

As a result of this activity, mortgage lenders may tend 

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

mortgage loans, leading to further margin pressures 

should interest rates rise. 

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

and corporate lending strategies. Such strategic shifts 

may be at least partially in response to pressures on net 

interest margins. The search for higher yield spreads 

may also explain the continuing growth in nondeposit 

funding sources, which often take the form of complex 

obligations with embedded options that can reduce 

funding costs at the expense of additional interest rate 

risk. 

Indicators of Industry Performance
 

Market Signals for the Banking 

Industry Are Mixed 

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

a sharp turnaround in investor attitudes toward banks in 

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

Bank Stock Index21 rose 21 percent, recovering all of 

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

The index has continued to rise in 1999. 

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

U.S. banks and finance companies reflect developing 

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

exceeded downgrades, Moody’s downgraded as many 

bank and finance company debt ratings as it upgraded 

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

downgraded the long-term debt ratings of 27 bank and 

finance companies and upgraded only 15—the highest 

quarterly ratio of downgrades to upgrades since 1992. 

Downgrades during 1998 were centered in finance 

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

emerging markets. 

Bank Performance Remains Strong but 

Earnings Variability Is Increasing 

Recent stable industry profitability in the aggregate has 

masked an increasing range of profit variability for 

individual commercial banks. Over the past six years, 

21 This index tracks the market capitalization of approximately 520 

banking companies. 

the annual aggregate return on average assets (ROA) for 

commercial banks has shown little fluctuation, ranging 

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

bank profitability, as measured by the distribution of the 

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

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

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

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

most profitable 5 percent of commercial banks was 

above 2.16 percent, up from 1.94 percent in 1994. 

Reasons for the increasing variability of commercial 

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

Chart 12 (next page) details the distribution of 1998 

22 FDIC Quarterly

www2.fdic.gov/qbp. 

CHART 11 

 Banking Profile, Fourth Quarter 1998, 

3.0 

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

Source: Bank Call Reports 

Bottom 5th Percentile 

Top 5th Percentile 

Mean 

The Range of Profitability for Commercial 

Banks Is Increasing 

Return on Asset Distribution 

–4.0 

–3.0 

–2.0 

–1.0 

0.0 

1.0 

2.0 

Memphis Regional Outlook 13 Second Quarter 1999 
In Focus This Quarter
 

CHART 12 

–5% 0% 5% 10% 15% 

1998 Performance Varies by 

Business Specialization 

Return on Assets Percentage Distribution 

Agricultural 

(2,274) 

International 

(11) 

Consumer 

(211) 

Commercial 

(3,150) 

Specialized 

(621) 

Credit Card 

(68) 

Note: Group institution count is in parentheses. 

Source: Bank Call Reports (Research Information System) 

Industry Mean ROA=1.13% 

Bottom Fifth Percentile 

Top Fifth Percentile 

ROA for six selected groups of banks segregated by line 

of business concentrations. This chart reveals that bank 

performance varies considerably by business specialty. 

For example, the distribution of ROA of credit card 

lenders23 differs significantly from that of other bank 

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

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

the least profitable commercial banks were members of 

small specialized or commercial groups. New banks 

have also influenced the dispersion of bank ROA. Banks 

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

institutions are excluded from the analysis. 

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

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

managed assets. 

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

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

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

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

Members of this group include de novo banks and more seasoned 

banks with low loan activity, such as trust companies. 

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

Far fewer commercial banks posted losses in 1998 than 

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

of unprofitable institutions appears to be rising despite 

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

capitalized and are burdened with fewer problem assets 

than their counterparts during the 1980s. 

Summary 

Most indicators of U.S. economic health remain robust 

in spite of the difficulties posed by low commodity 

prices and falling exports during 1998. The consensus 

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

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

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

threat—namely, price deflation brought on by global 

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

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

concern during 1999. Consumer spending and business 

investment seem particularly vulnerable to such shocks 

at this stage of the expansion. 

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

of indicators suggest that the risk profile of some 

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

by the long duration of the current expansion, many 

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

LTV loans and higher-risk leveraged commercial loans. 

The overall shift toward higher-risk credits is occurring 

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

and businesses (in the form of declining profits and 

increasing bond default rates). Credit-related concerns 

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

Memphis Regional Outlook 14 Second Quarter 1999 
In Focus This Quarter
 

trending downward. Finally, sustained weak commodity 

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

Bank and thrift net interest margins are being pressured 

by a flatter yield curve and heightened competition. 

Community institutions, which rely most heavily on 

interest income, are particularly vulnerable to tighter 

margins. The major concern in this area is that insured 

institutions will combat falling margins by entering into 

riskier funding and lending strategies. 

Market indicators and reported financial data reflect 

favorable industry performance as well as new sources 

of risk. Investor attitudes toward banking companies 

have improved since late 1998 because of an improved 

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

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

markets. Despite relatively strong aggregate industry 

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

activity and pressures in consumer and commercial 

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

worst performing 5 percent of all commercial banks 

were unprofitable last year. 

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

Maureen E. Sweeney, Associate Director 

Paul C. Bishop, Senior Financial Economist 

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

Steve Burton, Senior Banking Analyst 

Steven E. Cunningham, Chief, Financial Institutions Section 

Alan Deaton, Economic Analyst 

Diane Ellis, Senior Financial Analyst 

Jim Heil, Economic Analyst 

Brian Kenner, Financial Analyst 

Allen Puwalski, Senior Financial Analyst 

Memphis Regional Outlook 15 Second Quarter 1999 
Regional Perspectives
 

Regional Perspectives
 

•	 Employment growth in the Memphis Region continues to slow. The trend will likely continue throughout 

1999 because of continuing tight labor markets, the potential for slowing real estate construction, and the 

cumulative effects of the economic crises in Asia, Russia, and Brazil. 

•	 Banking conditions remain favorable, but earnings performance continues to be pressured by lower net 

interest margins. Asset quality indicators in 1998 were virtually unchanged from 1997. 

•	 Effects of the weaker global economy on the Region are most evident in lower commodity prices. This is particularly true for agricultural producers, but these weaknesses also affect the energy, timber, and primary 

metals industries. 

Economic Overview 

Employment Growth Continues to Slow 

Using employment growth as an indicator, the Region’s 

economy, while continuing to grow, is moderating (see 

Table 1). Year-over-year job growth has lagged behind 

the national average for the past two years. Employment 

growth in 1998 was hindered by slowing growth in the 

important service sector, which represents approximately 25 percent of the Region’s total employment, and 

accelerating job losses in the manufacturing sector. 

During 1998, the Region lost almost 20,000 jobs in nondurable goods manufacturing, which were only partially offset by a gain of 5,000 jobs in durable goods 

manufacturing. 

Among the Region’s states, only Kentucky reported 

better year-over-year employment growth in the fourth 

quarter of 1998 than in 1997. Kentucky’s economy continues to be driven by strong gains in both Louisville 

and Lexington; however, employment growth in both 

cities has begun to slow. In the first quarter of 1999, 

Philip Morris announced the closing of its Louisville 

cigarette manufacturing facility, which will cost the city 

1,400 high-paying jobs. The state’s economy continues 

to benefit from strong sales by its automobile industry. 

Ford Motor Company announced plans earlier this year 

to build a new and larger sports utility vehicle at its 

Kentucky Truck Plant. The expansion of the plant is 

expected to create approximately 1,000 new jobs. 

Other states in the Region experienced slower job formation in the fourth quarter of 1998. Arkansas and 

Mississippi reported the lowest year-over-year job 

growth, largely because of continued job losses in the 

nondurable goods sector and a significant slowdown in 

TABLE 1 

Employment Growth 

Continues to Slow 

(Year-over-Year Percent Change) 

4Q 1997 4Q 1998 

ARKANSAS 2.16 1.55 

KENTUCKY 2.17 2.26 

LOUISIANA 2.66 2.27 

MISSISSIPPI 2.36 1.35 

TENNESSEE 2.24 1.91 

REGION 2.32 1.94 

NATION 2.72 2.33 

Source: Bureau of Labor Statistics 

service employment growth. Louisiana and Tennessee 

also reported job losses in manufacturing. Both states 

reported stable growth in service sector employment 

and strong gains in construction-related employment. 

For the Region, construction employment growth 

reached 5.8 percent in the fourth quarter. Along with 

increasing government employment, construction was a 

major contributor to new job formation in the Region. 

Construction employment growth, however, could slow 

in response to slowing demand, as discussed below. 

Construction Could Slow in 

Response to Weakening Demand 

Many observers have become increasingly cautious in 

their views about commercial real estate development in 

the Region. Development in many metropolitan areas in 

Memphis Regional Outlook 16	 Second Quarter 1999 
Regional Perspectives
 

1998 was the highest in the past ten years. These high 

construction levels, coupled with slowing growth, are 

leading to rising vacancy rates and flattening rental 

rates for commercial real estate in some metropolitan 

areas (see also Regional Outlook, first quarter 1999). 

The Nashville market in particular is showing early 

signs of potential overbuilding, with office vacancy 

rates climbing from under 7 percent at the end of 1997 

to approximately 10 percent at the end of 1998. Other 

metropolitan markets, such as the Mississippi Gulf 

Coast, are showing early signs of slowing supply and 

demand; construction there has already begun to slow 

with the maturing of the area’s casino industry. 

The outlook for commercial development through 1999 

suggests additional risks are emerging for local 

economies and financial institutions. If development 

continues at its previous fast pace, some markets may 

become more vulnerable to overbuilding. In such a scenario, banks and thrifts that are active commercial real 

estate lenders may face elevated risks in their loan portfolios. If development slows in response to waning 

demand, local employment conditions could worsen 

with reduced construction employment. Although construction employment typically represents a relatively 

small segment of overall employment, it has been a significant aspect of recent employment growth in many 

metropolitan areas. 

The residential housing market also is likely to be 

affected by the slowdown in job formation and slowing 

net in-migration. Regional Financial Associates forecasts net in-migration to the Region to decline to 4,300 

people in 1999 from a reported 42,400 in 1997. While 

housing permit numbers continued to increase for most 

states in 1998, Arkansas reported an 8.2 percent decline 

in permits through November 1998. Further, Regional 

Financial Associates projects a reduction of approximately 25 percent in new residential housing permits 

for major metropolitan areas in the Region over the next 

two years, with those in Arkansas being most significantly affected. 

Global Weaknesses Continue 

Although the Region is less vulnerable to direct trade 

effects than the nation, weak global economic conditions are adversely affecting some sectors of the 

Region’s economy. According to information from the 

Massachusetts Institute for Social and Economic 

Research, the Region’s exports to the world declined 

4.7 percent in 1998. This represents the first year of 

declining exports since 1993. 

Adding to the slowdown in 

demand from Asia and Russia, 

the economic crisis in Brazil has 

reduced demand for certain manufacturing and agricultural products. Previously, Brazil had been 

a fast-growing market for the 

Region’s exports. Also, the devaluation of Brazil’s currency has made its agricultural 

products, notably soybeans, less expensive, and thus 

more competitive, on the world market. 

The effects of weaker global demand on the Region are 

most evident in lower commodity prices, particularly in 

agriculture, energy, timber, and primary metals. Each of 

these sectors is discussed in greater detail later in this 

article. Furthermore, the potential remains for continuing volatility in world financial markets and economies. 

Memphis Regional Outlook 17 Second Quarter 1999 
Regional Perspectives
 

Banking Overview
 

Banking Conditions Remain Favorable 

The Region’s banks and thrifts reported generally 

healthy financial conditions as of December 31, 1998, 

although earnings performance declined. The Region’s 

average return on assets (ROA) ratio was 1.06 percent 

for the year, down 6 basis points from 1997. Lower net 

interest margins (NIMs) were the driving factor in lower 

performance. The average NIM was 4.33 percent compared with 4.47 percent in 1997. The decline in NIMs is 

primarily attributable to the flat yield curve and 

increased price competition. Higher levels of noninterest income largely offset an increase in average noninterest expense in 1998. 

A continuing trend among the Region’s financial institutions is the divergence in earnings performance 

between large and small institutions. In 1998, the 47 

banks and thrifts in the Region with total assets over 

$500 million reported higher average ROAs than the 

Region’s 988 institutions with less than $500 million in 

total assets, despite lower NIMs (see Table 2). The 

stronger earnings performance of the larger banks is 

attributable to the higher level of noninterest income. 

Both groups reported similar ratios of noninterest 

expense to average earning assets. 

Financial institutions reported no significant changes in 

asset quality during 1998. Average total past-due loans 

were 2.97 percent of total loans at the end of 1998, comparable to 1997 levels. Within loan categories, commercial and industrial loan past-due ratios increased while 

consumer past-due ratios fell. Average loan losses in 

TABLE 2 

Average Earnings Performance in 

1998 Is Stronger at Larger 

Institutions 

ASSETS ASSETS 

>$500 <$500 

MILLION MILLION 

ROA % 1.26 1.05 

NIM % 4.22 4.34 

NONINTEREST INCOME/ 

AVG. EARNING ASSETS % 1.62 1.11 

NONINTEREST EXPENSE/ 

AVG. EARNING ASSETS % 3.57 3.55 

Source: Bank & Thrift Call Reports 

1998, at 0.41 percent of average loans, were similar to 

1997 loan losses. 

The composition of financial institution assets shifted 

in 1998. Loans declined slightly as a percent of total 

assets for the first time since 1992. Within loan categories, average consumer loan levels continued to 

decline, while commercial real estate loans increased, 

particularly at institutions headquartered in metropolitan areas. Average holdings of one- to four-family residential loans declined slightly in 1998 to 28.6 percent of 

total loans following two years of solid growth. As discussed earlier, some analysts predict a considerable 

slowdown in the Region’s net in-migration and home 

construction in 1999. As a result, banks and thrifts 

could experience escalating competition for fewer customers in this important loan category. 

Memphis Regional Outlook 18 Second Quarter 1999 
Regional Perspectives
 

Agricultural Conditions
 

Agricultural Sector Weaknesses 

Continue in 1999 

In 1998 some agricultural commodity prices important 

to the Region fell to their lowest levels in more than a 

decade because of abundant worldwide supplies and 

weaker demand. A strong U.S. dollar also contributed to 

a decline in agricultural exports. The United States 

Department of Agriculture (USDA) projects that the 

value of agricultural exports will fall for a second consecutive year in 1999. Prices for many commodities are 

expected to remain low, and according to the USDA, 

some crop prices, such as soybeans and cotton, will 

likely finish the year well below 1998 levels. 

The USDA estimates that net farm income for the nation 

totaled $48 billion in 1998, down 3.8 percent from 1997 

and down 10.0 percent from 

record results in 1996. The 

early 1999 forecast is for net 

farm income to total $44.6 billion, a decline of 16.4 percent 

from 1996. Both 1998 and 

1999 farm income numbers 

benefit from increased government assistance, including the $6 billion economic assistance package for farmers approved in October 1998. 

Net farm income in the Memphis Region in 1998 and 

1999 will likely decline more substantially than forecast 

for the nation as a whole. Farm income in the Region in 

1998 was disproportionately affected by dry growing 

conditions. During 1999, farmers of significant crops in 

the Region, especially soybeans and cotton, are likely to 

experience considerably lower cash receipts in addition 

to scheduled reductions in government payments. The 

USDA Economic Research Service projects that farmers in the lower Mississippi delta will be among those 

experiencing the greatest financial difficulty from 1998 

to 2003. 

Declining crop prices have not been a problem for all of 

the Region’s agricultural producers. Livestock growers 

have benefited from lower feed costs. Poultry producers 

in particular reported considerable improvement in profit margins. Although poultry prices weakened in early 

1999, continuing low feed costs should maintain the 

strong profit margins. Hog and cattle prices improved 

during 1998, although hog prices remain below the cost 

of production for most farmers. 

Agricultural Lenders Report 

Higher Past-Due Loan Ratios 

Banks with agricultural concentrations1 remain in generally strong financial condition despite weaknesses in 

the farm sector during 1998. Reported average leverage 

capital ratios remain strong at 11.34 percent of assets, 

and average ROAs remain healthy at 1.21 percent, 

although they have declined from 1.28 percent in 1997. 

Agricultural loan losses remain low and reflect the 

strong financial condition of most farmers at the beginning of 1998, following high net farm income in 1996 

and 1997. Certain other asset quality indicators, however, are showing the effects of lower commodity prices 

and poor crop production in 1998. 

•	 Total past-due agricultural loans are rising and 

equaled 2.43 percent of agricultural credits at yearend 1998, up from 1.92 percent at the end of 1997. 

Although this level remains manageable, it is the 

highest reported by agricultural lenders since 1992, 

as shown in Chart 1 (next page). Driven by increases 

in past-due agricultural loans, total past-due loan 

ratios also rose in 1998. 

•	 Carryover debt2 is increasing. Anecdotal evidence 

from examinations, examiner surveys, and discussions with agricultural lenders in the Region suggests a moderate increase in carryover debt at the end 

of 1998. Carryover debt could increase further given 

the potential for another difficult year for farmers in 

1999. Significant increases in carryover debt could 

not only impair asset quality but also lead to a tightening of agricultural banks’ liquidity levels. Funding, liquidity, and related interest rate risk for all 

banks and thrifts in the Region, including agricultural lenders, will be further explored in the Regional 

Outlook, third quarter 1999. 

As farmers are vulnerable to economic and weather 

effects, increases in carryover debt in any single year do 

not necessarily represent significant increases in risk for 

lenders. Greater concern arises, however, when the 

1 Defined as banks with 25 percent or more of total loans in agricultural production loans and loans secured by farm real estate. As of
 

September 30, 1998, 121 banks in the Region met this definition,
 

with $8.6 billion in total assets. 


2 Carryover debt discussed here describes situations in which farmers
 

had insufficient cash flow to repay crop loans from the previous year,
 

so the unpaid balance was added to the next year’s crop production
 

loan.
 

Memphis Regional Outlook 19	 Second Quarter 1999 
Regional Perspectives
 

CHART 1 CHART 2 Net Farm Income ($ billions)

Agricultural Asset Quality Deteriorates with 

Declines in the Region’s Farm Income 

Past-Due Agricultural Loans/ 

6 Total Agricultural Loans 4.0 

Farm 3.5 5 Income 

3.0 

4 2.5 

3 2.0 

1.5 2 

Agricultural Loan Loss Rates 1.0 

1 0.5 

0 0.0 

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

* denotes estimated farm income 

Sources: USDA Economic Research Service; Bank & Thrift Call Reports 

Past-Due Ratios and Loan 

Loss Rates (Percent) 

Employment in Agriculturally Dependent 

Counties Has Shown Higher Volatility 

5.0 

4.0 Other Counties in the Region 

3.0 

2.0 

1.0 

0.0 

–1.0 

–2.0 

–3.0 Agriculturally Dependent 

Counties in the Region 

–4.0 

–5.0 

’81 ’82 ’83 ’84 ’85 ’86 ’87 ’88 ’89 ’90 ’91 ’92 ’93 ’94 ’95 ’96 ’97 

Source: Bureau of Labor Statistics Employment Growth Rates (Percent)

trend continues for longer periods. As shown in Chart 1, 

1990 and 1991 represent two consecutive years of 

declining farm income preceded by two strong years. 

Past-due agricultural loans and agricultural loan losses 

at the Region’s agricultural banks were unaffected in 

1990 but rose substantially in 1991, the second consecutive year of lower farm income. Average past-due and 

nonaccrual agricultural loan ratios rose to 3.62 percent, 

and agricultural loan loss rates more than doubled to 

0.55 percent. This downturn in farm income coincided 

with an overall economic downturn, which likely contributed to farmers’ financial difficulties. 

By comparison, declining farm income in 1998 and 

projected declines for 1999 follow strong years in 1996 

and 1997. Although agricultural loan losses remained 

flat in 1998, past-due ratios for agricultural loans rose, 

signaling greater potential for higher losses in 1999. If 

farm income experiences a two-year decline similar to 

that of 1990 and 1991, the Region’s agricultural lenders 

will likely experience a considerable decline in asset 

quality. 

Lower Farm Income May Affect Other 

Insured Institutions in the Region 

Low commodity prices and last year’s poor growing 

conditions are affecting not only banks with agricultural loan concentrations but also commercial banks that 

do not have high agricultural loan concentrations but 

are located in agriculturally dependent counties.3 

3 Agriculturally dependent counties are defined in this article as those 

with at least 15 percent of employment in agriculture. 

Economic conditions in agriculturally dependent counties historically have been more volatile than in other 

counties. While employment growth in these counties 

has closely trailed growth in other counties in the 

Region in recent years, agriculturally dependent counties have shown greater volatility in prior periods (see 

Chart 2). This volatility is most evident in sustained 

periods of declining farm income such as during the 

early and mid-1980s and the 1990 to 1991 period. 

Similarly, per capita personal income growth for agriculturally dependent counties has shown greater variability, although it averaged slightly higher than for 

other counties from 1980 to 1996. Not surprisingly, per 

capita income in agriculturally dependent counties fluctuates with changing farm income levels. In every year4 

of declining farm income since 1980, the growth in per 

capita income for these counties has underperformed 

that of the remainder of the Region. 

One stabilizing factor for agriculturally dependent 

counties is the high average level of transfer payments 

(e.g., Aid to Families with Dependent Children) in 

these counties relative to total income. According to the 

most recently available information, transfer payments 

represent 20 percent of personal income for the Region 

and 24 percent of personal income for agriculturally 

dependent counties. Transfer payments in these counties could be less of a stabilizing factor in the future as 

state governments continue to adjust their assistance 

programs. 

4 Farm income in the Memphis Region has declined in eight of the 

years since 1980. 

Memphis Regional Outlook 20 Second Quarter 1999 
Regional Perspectives
 

Consistent with overall industry consolidation trends, 

the number of commercial banks in agriculturally 

dependent counties in the Region decreased from 406 in 

1988 to 300 in 1998. As of December 1998, these banks 

hold 11.7 percent of the Region’s total assets. These 

banks reported strong financial conditions with an average leverage capital ratio and ROA of 11.03 percent and 

1.13 percent, respectively. 

Farmland Values May Weaken 

Although the USDA projects that overall farmland values will increase in 1999, weaknesses in the sector may 

begin to place downward pressure on land prices. Early 

indications of falling land values already have been 

reported in portions of some states in the Midwest. 

Declining land values indicate expectations of at least 

several years of lower farm incomes in the near future. 

The value of Memphis Region farmland is more responsive to periods of longer term financial stress in the 

agricultural sector than to one-year variations. Area 

farmland values rose steadily throughout much of the 

1990s despite one-year declines in farm income such as 

those reported in 1993 and 1995. However, Mississippi, 

Arkansas, and Louisiana reported declining average 

farmland values following the two-year period of lower 

farm income at the beginning of the decade. With the 

1998 to 1999 period expected to represent another twoyear period of lower farm income, land values could follow a similar pattern. Falling land values could erode 

collateral protection for banks as well as a primary 

source of farmers’ net worth. Some farmers may have 

difficulty arranging financing in the coming years 

because of the combination of lower farm income, 

reduced collateral values, and declining net worth. 

Farmers nearing retirement may be unwilling to “farm 

on their equity” and could place their farms for sale, 

adding to the downward pressure on land values. 

Some Farms Face Additional Debt Burdens 

Some farmers may soon find themselves struggling to 

repay debt that was written down ten years ago through 

what were called “shared appreciation agreements.” 

These agreements allowed farmers facing debt repayment problems to have the debt written down by the 

Farm Service Agency (formerly the Farmer’s Home 

Administration); but the agreements provide for the 

possible recapture of the portion written down. The 

recapture amount is based on appreciation in the value 

of farmland securing the agreements during the subsequent ten years. These agreements first became available in 1989, and appraisals will be performed on the 

land securing these agreements this year. In cases where 

there has been a substantial appreciation in land values, 

the recaptured debt could add to the financial stress of 

farmers who are already feeling the effects of a weak 

farm economy. 

According to the Farm Service Agency, approximately 

1,700 farms in the Region currently are covered by 

these agreements, with two-thirds being subject to 

recapture in 1999 and 2000. Although the exact amount 

of the recaptures cannot be determined until appraisals 

are completed, the amount of debt previously written off 

in the Region totaled $271 million. Farmers in 

Arkansas, Mississippi, and Louisiana hold the majority 

of these agreements. 

Memphis Regional Outlook 21 Second Quarter 1999 
Regional Perspectives
 

Lower Energy Prices Dampen Louisiana’s Economy
 

Declining oil and gas prices in 1998, shown in Chart 3, 

led to a slowdown in Louisiana’s energy sector. During 

1998, the industry lost 3,000 jobs, mostly in New 

Orleans, Houma, and Lafayette. The state’s rotary rig 

count, which provides an indication of production levels, also fell substantially, from an average of 216 in 

January to 147 in December. The drop in prices 

adversely affects more than oil and natural gas extraction employment in Louisiana, as the energy sector 

drives many supporting service and manufacturing sector jobs. 

CHART 3 

10 

11 

12 

13 

14 

15 

16 

17 

18 

Energy Prices Declined Sharply in 1998 

Oil Price per Barrel ($)

Gas Price per mmbtu ($) 

Source: The Wall Street Journal 

1Q98 2Q98 3Q98 4Q98 1Q99 

1.0 

1.5 

2.0 

2.5 

3.0 

Natural Gas Prices 

Louisiana 

Sweet Oil 

Energy prices rebounded somewhat in early 1999, and 

many analysts expect prices to remain stronger 

throughout the year. Higher prices should benefit energy sector employment. However, possible further 

slackening in worldwide demand and the potential 

inability of the Organization of Petroleum Exporting 

Countries to affect prices through production quotas 

create some uncertainty in the forecasts for higher 

prices. Even with a sustained recovery in energy prices, 

Louisiana could experience additional job losses as 

energy companies strive to improve their ability to 

compete by reducing costs. 

Louisiana is less dependent on the energy sector now 

than in the past5 (see Regional Outlook, second quarter 

1998). Nonetheless, energy remains a significant component of the state’s overall economy and is concentrated in the coastal parishes, where effects may be 

more pronounced. In these parishes, declining energy 

sector employment could compound concerns resulting from declining manufacturing employment and 

lower farm income. Financial institutions operating in 

these areas could begin to see declining loan demand 

and deteriorating quality in segments of their loan 

portfolios. 

5 Oil and gas extraction represented 14.6 percent of gross state product (GSP) in 1996 compared with 30.7 percent of GSP in 1981. 

Memphis Regional Outlook 22 Second Quarter 1999 
Regional Perspectives
 

The Timber Sector Is Weakening
 

Despite the favorable effects of strong housing starts 

nationally in 1998, the sale of timber and timber-related 

products has been adversely affected by weaker global 

demand. Historically, the United States has been a 

heavy exporter of such products to Asian nations, principally Japan. The slowdown in exports to these nations 

has led to increased domestic inventories and lower timber prices. According to Random Lengths, a timber 

industry trade publication, the average annual price per 

thousand board feet of framing lumber declined from 

$417 in 1997 to $349 in 1998. 

Within the Memphis Region, timber-related employment is concentrated in southwestern Arkansas, northwestern Louisiana, and much of Mississippi. This 

employment is primarily in the lumber industry, with 

121,512 jobs reported in 1997, and the pulp and paper 

industry, with 70,259 jobs reported in 1997. The lumber 

industry has reported generally positive employment 

growth in recent years largely because of increasing 

demand resulting from higher housing starts. Employment growth in paper and allied products has steadily 

declined since 1992. In 1996 and 1997, job losses were 

reported in the industry. The slowdown in pulp and 

paper stems from industry overcapacity and increasing 

competition that existed before the slowdown in global 

economies. 

In response to slackening worldwide demand, some 

lumber and pulp and paper layoffs were announced in 

the second half of 1998, mostly 

in Louisiana. The companies 

announcing layoffs ranged in size 

from large pulp and paper manufacturers, such as International 

Paper Corporation, to local sawmills. If prices of timber products 

remain low, this trend is likely to 

continue. 

Both industry segments show significant vulnerability 

during economic downturns. The lumber industry is 

more cyclical than pulp and paper because of the close 

relationship of lumber demand and construction activity. During the last recession, for example, lumber 

employment in the Region declined by 2.8 percent. 

The Region Is Coping with Lower Metal Prices
 

The U.S. primary metals industry6 experienced a significant decline in overall prices during 1998 because of 

weakening worldwide demand, increased competition, 

and rising inventories. Aluminum cash prices, for example, declined approximately 25 percent, and scrap steel 

prices declined even more substantially. 

The primary metals industry employs approximately 

54,000 people in the Region. These jobs are concentrated in Kentucky, Tennessee, and eastern Arkansas. The 

industry contributes 0.9 percent of gross state product 

6 The primary metals industry includes, but is not limited to, steel, 

copper, nickel, cobalt, zinc/cadmium, and aluminum. 

(GSP) in Tennessee and roughly 1.7 percent of GSP in 

both Arkansas and Kentucky. 

Anecdotal evidence suggests that low prices resulted in 

stagnant employment growth in the Region’s metalproducing industry. Recent industry news in the area, 

however, is generally positive, with expansions and new 

hiring plans being announced. The local primary metals 

industry possesses a competitive advantage over other 

metal-producing areas of the country because of lower 

labor costs and generally newer and more efficient production facilities. These factors should provide greater 

employment stability to the Region’s primary metals 

sector than in the industry nationwide. 

Memphis Region Staff 

Memphis Regional Outlook 23 Second Quarter 1999 
✁
 

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