Regional Outlook
 

FEDERAL DEPOSIT INSURANCE CORPORATION	 SECOND QUARTER 1999 

FDIC
 

Atlanta
 

Region
 

Division of
 

Insurance
 

Jack M.W. Phelps,
 

Regional Manager
 

Scott C. Hughes,
 

Regional Economist
 

Pamela R. Stallings,
 

Senior Financial
 

Analyst
 

W. Brian Bowling,
 

Senior 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 

◆ Atlanta Region Economic Growth Continues to Outpace That of the 

Nation—Economic growth in the Atlanta Region continued to outpace that of the 

nation into early 1999, while commercial bank and thrift returns remained reasonably strong in the fourth quarter...earnings momentum may be slowing, however...several banks in the Region with significant consumer loan exposure are 

located in or near counties with high personal bankruptcy rates, and this fact 

could imply higher credit risk for such institutions should the economy weaken. 

See page 16. 

By 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 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 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 

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 confiAtlanta 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. 

Atlanta 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 

Atlanta 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. 

Atlanta 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. 

Atlanta 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 

Atlanta 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 

Atlanta 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. 

Atlanta 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. 

Atlanta 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) 

Atlanta 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 

Atlanta 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 

Atlanta 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 

Atlanta Regional Outlook 15 Second Quarter 1999 
Regional Perspectives
 

Regional Perspectives
 

•	 Atlanta Region economic growth continued to outpace that of the nation into early 1999. 

•	 Atlanta Region commercial bank and thrift returns remained reasonably strong in the fourth quarter, but 

earnings momentum may be slowing. 

•	 Several banks in the Region with significant consumer loan exposure are located in or near counties with 

high rates of personal bankruptcy, and this situation could imply higher credit risk for some institutions 

should the economy weaken. 

Atlanta Region Economic Growth Continues to Outpace That of the Nation 

Economic growth in the Atlanta Region and the nation 

remains strong, especially given the age of the current 

expansion. In February 1999, the current expansion, at 

95 months, became the second-longest since World War 

II, according to the National Bureau of Economic 

Research. The longest expansion, 105 months, occurred 

in the 1960s. By comparison, expansion in the 1980s 

endured for 91 months. The current period of growth 

has been fueled by several factors, including low interest rates and inflation, strong real income growth, and 

sustained high levels of consumer confidence. Furthermore, economic growth in the Atlanta Region continues 

to outpace national performance. Employment in the 

Region in February 1999 was up 3.1 percent from one 

year earlier, compared with 2.2 percent growth nationwide. Nonetheless, growth may have moderated slightly after reaching a peak during the summer of 1998, 

when year-over-year job growth in the Atlanta Region 

and the nation measured 3.7 percent and 2.7 percent, 

respectively. 

Bank Performance Remained Strong 

in the Fourth Quarter, but Earnings 

Momentum May Be Slowing 

The gap between large and small bank performance 

widened in the fourth quarter. Large banks (assets over 

$1 billion) benefited from noninterest income gains, 

lower reserve provisions, and profitable credit card 

banking operations. Meanwhile, small banks (assets 

under $1 billion), which account for 95 percent of the 

Region’s institutions, continued to be hurt by declining 

net interest margins and limited fee income production. 

Banks in the Atlanta Region had limited direct exposure 

to the troubled foreign markets that led to trading 

losses and asset write-downs for some of the industry’s 

largest institutions in the second half of 1998. Chart 1 

illustrates Atlanta Region bank returns by asset size. 

Although performance remains strong overall, earnings 

momentum may be slowing. The percentage of unprofCHART 1 

Atlanta Region Large Banks Outperformed 

the Nation in the Fourth Quarter of 1998, 

While Small Bank Returns Lagged behind 

National and Year-Ago Levels 

2.00 Region Region U.S. 

1.75 4Q97 4Q98 4Q98

% Return on Assets 1.50 

1.25 

1.00 

0.75 

0.50 

0.25 

The Atlanta Region commercial bank return on assets 

(ROA) of 1.40 percent in the fourth quarter of 1998 

comfortably outpaced the national average of 1.11 

percent. Four states—Georgia, North Carolina, 

South Carolina, and Virginia—reported above-average returns in the quarter, while Alabama, Florida, 0.00 

and West Virginia lagged behind their regional and 

Under $100M $1B to Over 

$100M to $1B $10B $10B 

national peers. Source: Bank Call Reports 

Atlanta Regional Outlook 16	 Second Quarter 1999 
Regional Perspectives
 

itable commercial banks in the Atlanta Region has been 

edging higher on a comparative-quarter basis over the 

past three years. In the fourth quarter of 1998, 15 percent of the Region’s banks were unprofitable, versus 12 

percent in the fourth quarter of 1997 and 9.5 percent in 

1996. As seen in Chart 2, the upward trend in unprofitable institutions has been consistent across asset sizes, 

although the constraining factors differ for large and 

small banks. The ratio of unprofitable small banks has 

been influenced by heavy de novo activity, as more than 

half of the unprofitable institutions with assets under 

$100 million in the fourth quarter of 1998 were chartered within the past three years. Conversely, unprofitable banks with assets over $1 billion generally have 

been affected by restructuring and merger-related 

expenses. 

The Region’s thrift sector also showed signs of slowing 

earnings in the second half of 1998. Savings institutions reported an aggregate fourth-quarter ROA of 

0.54 percent, down from 0.63 percent a year ago and 

below the national level of 0.76 percent. In fact, the 

group’s fourth-quarter return was the lowest since the 

Savings Association Insurance Fund (SAIF) recapitalization charge in the third quarter of 1996. Results 

were weaker in part because of restructuring charges at 

some large thrifts, while declining interest spreads continued to weigh heavily on the entire sector. About 13 

percent of the Region’s thrifts were unprofitable in the 

fourth quarter, up slightly from 12.5 percent one year 

earlier. 

A review of full-year 1998 earnings for Atlanta Region 

insured bank and thrift institutions (excluding de 

novos chartered in the past three years) found that only 

about 40 percent reported a higher ROA in 1998 than 

in 1997, whereas 58 percent reported a lower return, 

and 2 percent reported no change. Despite an apparent 

earnings slowdown, however, the condition of banks 

and thrifts in the Atlanta Region remains strong. As 

discussed below, institutions in most states enjoy reasonably strong earnings and low levels of delinquent 

and charged-off loans. Concentrated lending exposures, for the most part, remain confined to real estate 

construction and development funding in metropolitan 

Atlanta and agricultural lending in southern Georgia 

and Alabama. Consumer loan allocations also are 

above average in parts of Georgia, Alabama, and the 

Virginias (see Emerging Consumer Credit Risk 

Could Affect Insured Institutions in the Atlanta 

Region). 

CHART 2 

Percentage of Unprofitable Commercial Banks
 

in the Atlanta Region Has Been
 

Increasing across Asset Sizes
 

4Q96 

4Q97 4Q98 

25 

20 

15 

10 

5 

0 

% Unprofitable 

All Banks Under $100M $1B to Over 

$100M to $1B $10B $10B 

Source: Bank Call Reports 

Alabama banks rebounded from a weaker third quarter 

to report a fourth-quarter 1998 ROA of 1.07 percent. 

However, a lower net interest margin and higher overhead costs held the aggregate return below the year-ago 

level of 1.21 percent. 

Real estate and commercial loans have increased as a 

percentage of assets over the past year at banks with 

assets over $1 billion, while smaller institutions report 

slightly lower levels of real estate loans and a higher 

allocation to the consumer sector. The rising share of 

real estate loans is not entirely surprising, given Alabama’s stable economic growth and increases in construction activity. Commercial construction in the state 

through the third quarter of 1998 stood at 8.4 million 

square feet, which was higher than the total for 1997. 

The largest share of building is occurring in the Birmingham, Huntsville, and Montgomery metropolitan 

areas. Dothan and Decatur have seen gains in commercial construction activity as well. 

Asset quality at Alabama’s commercial banks remains 

strong, although small bank delinquencies and chargeoffs have risen in recent quarters as a result of continued 

pressure on the state’s agriculture, pulp and paper, and 

apparel industries. Agriculture’s performance was mixed 

during 1998, as a string of severe weather patterns 

resulted in substantial crop damage. Most heavily damaged was the state’s corn crop, which, at 12.6 million 

bushels, was 42 percent smaller than in 1997. The agricultural outlook for 1999 remains relatively dim, as market prices for some of the state’s primary commodities 

are well below year-ago levels, and the U.S. Department 

Atlanta Regional Outlook 17 Second Quarter 1999 
Regional Perspectives
 

of Agriculture projects continued price weakness. Active 

consumer lending by some small banks in counties with 

high personal bankruptcy rates also may have contributed 

to the increase in loan delinquencies and charge-offs. 

Alabama’s thrift sector performed well in 1998. Thrifts 

posted a fourth-quarter return of 0.81 percent, compared to 0.48 percent in the same period in 1997. Higher fee income and slightly lower provision expenses 

contributed to the improved performance. Loan composition at Alabama thrifts shifted moderately away from 

consumer loans and into real estate in the fourth quarter, following several quarters in which the consumer 

allocation had been increasing. Loan delinquencies 

declined in 1998, although the more severe noncurrent 

category (90+ days past due and nonaccrual) edged 

slightly higher. Reserve coverage of noncurrent loans 

has generally trended lower since mid-1997. 

Banks in Florida reported a fourth-quarter 1998 ROA 

well above the 1997 level, but at 1.07 percent the return 

was the third-lowest in 12 quarters. Florida’s banking 

landscape remains highly competitive, particularly with 

the recent acquisition of the state’s largest bank by an 

out-of-state organization. A number of banks are 

aggressively entering Florida hoping to benefit from its 

strong economy and attract customers displaced by 

merger activity. Job growth in the 

state has risen by more than 3 percent annually since 1993, which 

is a figure well ahead of national 

performance. A strong state economy has led to increased de novo 

activity, and this activity has further intensified competition. 

Competitive pressures and a flattened yield curve contributed to a decline of 16 basis points in net interest 

margins of small banks from the fourth quarter of 1997 

to the same period in 1998—a decline that was fully 

reflected in the group’s ROA. Asset quality remains 

strong in the state, with delinquent loans reaching a 

three-year low in the fourth quarter. 

Commercial lending is increasing in Orlando, Miami, 

Jacksonville, and Tampa, as strong growth continues 

in metropolitan areas. Orlando’s theme parks are currently on their “biggest building binge since Walt 

Disney arrived,” according to a recent article in the 

St. Petersburg Times. Office construction also has 

remained strong in the Orlando area, with over a halfmillion square feet of new space added to the market in 

the first half of 1998. Higher levels of construction also 

are evident in the growing Miami, Jacksonville, and 

Tampa markets. 

Florida’s thrifts reported a lower fourth-quarter ROA 

than in 1997, largely attributable to a lower net interest 

margin. The state’s thrift net interest margin was the lowest in the Region in the fourth quarter of 1998 at only 

2.90 percent, as asset yields lagged behind the regional 

average by 21 basis points. Twenty-six percent of Florida’s thrifts were unprofitable in the fourth quarter of 

1998—the highest level since the SAIF recapitalization 

charge in the third quarter of 1996. Asset quality measures remain strong, however, as Florida thrifts had the 

Region’s lowest past-due loan ratio in the fourth quarter, 

1.51 percent. Recently, Florida’s thrifts have reduced their 

consumer loan allocation in favor of real estate and commercial credits, an action that is consistent with what 

banks have done in light of the state’s vibrant economy. 

Georgia’s banking sector continues to benefit from a 

strong state economy, as evidenced by a fourth-quarter 

1998 ROA of 1.42 percent. Large banks and credit card 

institutions contributed heavily to the strong return, 

although a number of unprofitable de novos held the 

small bank ROA below the year-ago level. Loan composition remained stable during the year, although small 

banks reported a slight shift from real estate to consumer loans. As discussed below, a number of Georgia 

banks with significant consumer loan exposure are 

located in areas that have high rates of personal bankruptcy, a situation that could imply higher credit risk. 

Booming real estate markets around metropolitan 

Atlanta have resulted in construction and development 

lending exposure significantly above the national average for banks in that area. Commercial construction 

starts in metro Atlanta were up 8.6 percent through the 

third quarter of 1998 from one year earlier. Residential 

construction activity also saw strong gains in 1998, with 

total permit issuance rising more than 16 percent from 

the previous year. 

Aside from real estate, several South Georgia institutions report above-average lending exposure to the troubled agricultural sector. Delinquent farm and farmland 

loans have increased sharply over the past two quarters 

for banks in that area as a result of depressed commodity prices, lower export demand, and severe weather 

damage to 1997 crops. Economic conditions throughout 

much of Georgia’s farm belt have been worsened by 

continued losses in textile and apparel employment. 

Weakness in the agriculture and textile and apparel 

Atlanta Regional Outlook 18 Second Quarter 1999 
Regional Perspectives
 

industries is reflected in the Albany metropolitan area, 

where employment fell 0.4 percent in 1998. 

Georgia’s fourth-quarter thrift ROA improved to 0.59 

percent in 1998 from 0.04 percent in 1997 as a result of 

sharply lower overhead spending. In fact, overhead 

ratios in the third and fourth quarters of 1998 were the 

lowest in 12 quarters for the group. This fact helped offset continued declines in the net interest margin. Loan 

delinquencies increased from a year ago, although the 

noncurrent portion moderated somewhat. Loan composition at Georgia’s thrifts shifted away from the consumer and commercial sectors and toward real 

estate-backed products in 1998. 

North Carolina banks, led by large Regional and 

super-Regional organizations, reported a strong 1.53 

percent fourth-quarter ROA. Aggressive acquisition 

activity has solidified North Carolina’s position as one 

of the nation’s premier banking centers, with over $650 

billion in assets at year end. The state’s banking sector 

is quite concentrated, however, with 4 banks holding 95 

percent of the assets and 63 banks controlling the 

remaining 5 percent. As a result, aggregate data are not 

always representative of the majority of North Carolina 

banks. For example, institutions in the state with assets 

under $100 million reported an ROA of –1.07 percent in 

the fourth quarter of 1998. This negative return does not 

necessarily reflect poor operating performance, but 

rather a high concentration of de novo banks that have 

not yet achieved sustainable profitability. Of 16 banks 

in the state with assets under $100 million that were 

unprofitable in the fourth quarter, 14 had been open less 

than two years. The next-largest group of banks (assets 

between $100 million and $1 billion) fared better, with 

an ROA of 1.14 percent, but that was the group’s lowest 

quarterly return in three years. A lower net interest margin and a slight drop in fee income accounted for the 

decline. Banks with assets over $1 billion reported 

stronger returns, primarily because of higher fee income 

and a more stable net interest margin relative to smaller 

banks. 

North Carolina banks report few credit concentrations, 

although commercial loan growth has occurred as construction starts have risen in many markets. Charlotte, 

Raleigh-Durham, and Greenville are seeing the bulk of 

the state’s construction activity. Although for the most 

part absorption has kept pace with new construction, 

pockets of overbuilding may be developing in some markets. If planned projects materialize, particularly in 

Charlotte and Raleigh-Durham, vacancy rates could rise. 

North Carolina’s thrift industry is the largest in the 

Atlanta Region and is nearly as large as the state’s banking sector in terms of institutions. Higher overhead and 

a lower net interest margin reduced the group’s ROA to 

0.34 percent in the fourth quarter of 1998 from 0.86 

percent a year ago. Fee income rose slightly during the 

year but still measured less than half of the regional 

thrift average in the fourth quarter, at 0.44 percent of 

earning assets. Asset quality measures remain very 

strong. Delinquencies were a modest 1.74 percent of 

loans at year-end, and charge-offs have not exceeded 

0.05 percent of loans in the past nine quarters. 

South Carolina banks posted a solid fourth-quarter 

ROA of 1.29 percent and continue to benefit from the 

state’s growing economy. Job growth in the state 

reached 3.9 percent in 1998, pushing the unemployment 

rate down to 3.5 percent. Unlike 

most banks elsewhere in the 

Atlanta Region, South Carolina 

banks have seen only a modest 

decline in their net interest margin 

from one year ago. Moreover, 

banks in the state were able to 

expand fee income while holding 

overhead costs steady in 1998. 

Only banks with assets under $100 

million reported a lower fourthquarter return in 1998, as a result 

of margin compression and de novo activity. Asset quality remained very strong across asset sizes in the fourth 

quarter, with delinquencies well below the regional 

average. 

South Carolina thrifts also are prospering, reporting 

the Region’s highest ROA of 1.19 percent in the fourth 

quarter of 1998. The group continues to operate with 

high efficiency, as the overhead expense ratio has 

exceeded 3 percent only twice in the past 12 quarters. 

Also, like banks, thrifts in the state have been less affected by net interest margin compression than those in 

other states in the Region. Credit quality indicators 

remain strong and are little changed from a year ago. 

Virginia banks performed well in the fourth quarter of 

1998, posting an ROA of 1.41 percent. Credit card bank 

profitability contributed to the high return, while results 

were reduced somewhat by merger-related charges at the 

state’s largest bank. Small banks reported the weakest 

quarterly return, at 0.52 percent; however, of 11 unprofitable banks in that category, 8 were de novos open less 

than one year. 

Atlanta Regional Outlook 19 Second Quarter 1999 
Regional Perspectives
 

Asset quality indicators remain strong across asset 

sizes. Credit concentrations remain relatively low, with 

moderate construction lending exposure in the Norfolk 

and Northern Virginia metropolitan markets as well as 

pockets of above-average consumer loan exposure in 

some central and western counties. 

Virginia’s thrifts posted a fourth-quarter return above the 

year-ago level, although still relatively weak at 0.44 percent. Performance has been hurt by poor results at the 

state’s largest thrift, which primarily conducts operations 

outside the state. Asset quality measures are strong and 

have improved from a year ago. Robust economic activity has led to higher real estate and commercial loan 

allocations in recent quarters. The number of thrifts in 

the state declined in 1998 by 30 percent, from 28 to 20, 

as a result of merger and acquisition activity. 

Fourth-quarter 1998 returns were lower at both large 

and small banks in West Virginia, as the aggregate 

ROA fell 77 basis points from 1997 to 0.52 percent. 

However, the measure was affected by a substantial 

quarterly loss at one large institution. The percentage of 

unprofitable banks in the state rose to 12 percent in the 

fourth quarter of 1998 from 5 percent one year earlier. 

Unlike most states in the Region where unprofitables 

reflect a number of de novos, only 3 of 11 unprofitable 

West Virginia banks in the fourth quarter were chartered 

within the past three years. Factors contributing to 

losses at some “seasoned” institutions included mergerrelated charges, asset write-downs, and loan chargeoffs. Some commercial banks, mostly in the western 

half of the state, reported above-average loan exposure 

to the consumer sector where delinquencies and chargeoffs have been increasing. Meanwhile, the state has the 

Region’s lowest commercial loan portfolio allocation, a 

situation consistent with an overall rate of economic 

activity below that of the Region. In 1998, employment 

in the state rose 1.6 percent, a full percentage point 

below the national average. 

West Virginia’s thrift industry is small, with seven institutions comprising assets of less than $1 billion. The 

group’s fourth-quarter ROA was essentially unchanged 

from a year earlier at 0.56 percent. Lower funding costs 

offset a decline in asset yields during the year, while net 

overhead expenses rose slightly. Past-due loans 

increased relative to total loans in 1998, although there 

was a slight decline in the level of severely delinquent 

loans. 

Emerging Consumer Credit Risk Could Affect 

Insured Institutions in the Atlanta Region 

Consumer spending accounts for two-thirds of the 

nation’s economy. With the economy now entering an 

impressive ninth year of expansion, it is not surprising 

that consumer spending is at an all-time high. Consumer spending, however, has been increasing faster 

than gains in disposable income since 1996. In 1998, 

real personal consumer expenditures in the United States rose by 

4.9 percent, compared with a 3.2 

percent rise in disposable income. 

According to a Federal Reserve 

Bank of St. Louis report, the disparity between consumer spending 

and income helped push the U.S. 

household debt1

-to-income ratio to its highest level ever 

in the first half of 1998. On the positive side, declining 

interest rates and a growing trend toward consolidating 

high-priced consumer debt into fixed low-rate mortgages have allowed consumers’ overall debt-service 

burden to increase more slowly than their outstanding 

debt. Nonetheless, as households borrow more and save 

less, lenders become less protected by existing assets 

and current income, as well as increasingly dependent 

on future employment, income, and asset appreciation 

that can only be assured by a continued strong economy. 

Portfolios with a high volume of unsecured loans or 

advances to borrowers of marginal or subprime credit 

quality are particularly vulnerable. 

The following section looks at consumer credit exposure at insured community banks2 in the Atlanta Region. 

The FDIC defines a “consumer lender” as having a ratio 

of total consumer loans, including residential mortgages, to assets of 50 percent or more. However, given 

the risk differential between residential mortgages3 

(lower risk) and other consumer loans such as credit 

cards, auto loans, and other personal loans (higher risk), 

1 Household debt includes first and second mortgages, credit card balances, auto loans, and other loans for consumer purposes. 

2 Insured community banks include commercial banks headquartered 

in the Atlanta Region. For this analysis, credit card specialty banks 

and all institutions with assets over $1 billion were excluded, as their 

activities often extend well beyond Regional boundaries. De novo 

institutions open less than one year also were excluded. 

3 Recent evidence suggests that loss rates on subprime and high loanto-value mortgages are higher than on traditional residential mortgages. However, these products cannot be discerned from Call Report 

data and are therefore not a focus of this analysis. 

Atlanta Regional Outlook 20 Second Quarter 1999 
Regional Perspectives
 

the following analysis focuses primarily on nonmortgage consumer loans. 

Table 1 shows that consumer loans at insured commercial banks in the Atlanta Region have been falling relative to assets since 1995. Total consumer loans, 

including residential mortgages, declined from nearly 

33 percent of assets in 1995 to less than 30 percent in 

1998. However, the year-end level was still above the 

national average. 

At the same time, nonmortgage consumer loans have 

fallen from over 11 percent of assets in the mid-1990s 

to around 9.5 percent in 1998. Atlanta Region institutions also remain comparatively more exposed to this 

segment than those of the nation as a whole. A few factors may help to explain the downward trend in the consumer portfolio allocation. First, the data in Table 1 

exclude institutions with more than $1 billion of assets, 

as well as all credit card specialty lenders. Thus, the 

data ignore the potentially large consumer lending 

activity of 55 commercial banks and 11 credit card specialty banks headquartered in the Region. (The exclusion of these institutions was necessary because Call 

TABLE 1 

Reports do not collect geographic lending data, and the 

activities of these institutions extend well beyond 

Regional boundaries.) Second, the Region’s continued 

strong economy has sustained high demand for larger 

and potentially more attractive real estate and commercial and industrial loans at many institutions. A third 

possible explanation may be that credit unions and nonbank finance companies are becoming increasingly 

competitive with insured institutions and may have captured some of the consumer market in recent years. 

A 1998 nationwide survey4 of household finances conducted by National Decision Systems, Inc. (NDS), 

summarized in Table 2 (page 23), found total household 

debt levels in the Atlanta Region to be less than the 

national average when measured as a percentage of 

household income. However, the survey also found that 

4 The household consumer finance survey is conducted annually by 

National Decision Systems, Encinitas, California. The survey 

addresses general household banking practices; borrowing habits 

(credit cards, mortgages, lines of credit, auto loans and leases, etc.); 

investable assets (checking and savings accounts, certificates of 

deposit, and other investments); insurance products; and household 

income and demographic information. 

Consumer Loans Are Declining as a Percentage of Assets 

in the Atlanta Region, but Nonmortgage Exposure 

Remains above the National Average 

CONSUMER NON­ NON­ NONCURRENT NON­ NON­ NONLOANS MORTGAGE MORTGAGE NON­ MORTGAGE MORTGAGE MORTGAGE 

(INCLUDING LOANS CONSUMER MORTGAGE CONSUMER CONSUMER CONSUMER 

MORTGAGES) TO LOAN CONSUMER LOAN LOAN LOAN 

INSTITUTIONS TO ASSETS ASSETS YIELD LOANS CHARGE-OFFS GROWTH 

YEAR (#) (%) (%) (%) (%) (%) (%) 

1990 1,482 32.36 12.85 11.83 0.86 1.02 0.68 

1991 1,473 32.10 11.73 12.03 0.89 1.22 (4.37) 

1992 1,451 31.91 10.76 11.31 0.71 1.13 (2.87) 

1993 1,382 31.57 10.44 10.67 0.57 0.78 4.86 

1994 1,304 32.94 11.20 10.20 0.52 0.59 10.37 

1995 1,222 32.96 10.74 10.83 0.61 0.74 5.36 

1996 1,134 31.70 10.02 11.07 0.74 0.91 6.65 

1997 1,095 31.29 9.54 11.19 0.79 0.99 3.72 

1998 1,028 29.81 9.55 11.24 0.85 1.13 4.30 

U.S. 1998 8,162 25.94 7.98 — — — — 

Data reflect insured commercial banks in the Atlanta Region with assets less than $1 billion and excluding credit 

card banks. De novo institutions open less than four quarters from each year-end have been excluded. 

Noncurrent consumer loans include loans past due 90 or more days and nonaccruals. Consumer loan charge-offs 

are net of recoveries. Growth rates are merger-adjusted. 

Source: Bank Call Reports 

Atlanta Regional Outlook 21 Second Quarter 1999 
Regional Perspectives 

nonmortgage consumer debt represented a larger share 

of household income in the Atlanta Region than in the 

nation as a whole. The fact that both Call Report data 

and the NDS survey show above-average levels of nonmortgage consumer debt in the Atlanta Region is 

notable because delinquency and charge-off rates for 

this portfolio segment have been rising in the Region 

since 1994. In fact, these ratios are nearing levels 

reached during the 1990–91 recession. Given high 

employment, rising household incomes, record levels of 

unrealized financial-market wealth, and low interest 

rates, these would appear to be the “best of times” for 

U.S. consumers. For that reason, upward trends in delinquencies and charge-offs raise some concern, as an economic slowdown (lower income and employment 

growth) or an increase in interest rates (higher interest 

burden) could weaken consumers’ ability to service an 

unprecedented level of personal debt. 

In view of some signs of weakening consumer credit 

quality, particularly in the nonmortgage segment, it is 

important to identify insured commercial banks that 

are actively involved in this type of lending. For this 

analysis, we used a threshold of nonmortgage consumer loans-to-assets of 20 percent—roughly twice the 

regional average and nearly three times the national 

average. This process identified 705 Atlanta Region 

commercial banks, with assets totaling $11.6 billion, as 

having significant nonmortgage consumer loan exposure at the end of 1998. These institutions were concentrated in four states: Georgia (20), Virginia (16), 

Alabama (12), and West Virginia (11) (see Table 3, 

page 24). A majority of the institutions, particularly in 

Georgia and Alabama, were located in areas where personal bankruptcy rates also were well above average. 

Historically, there has been a strong positive correlation between personal bankruptcy rates and consumer 

loan charge-offs at insured institutions (see February 

1998 Bank Trends: A Time Series Model of the U.S. 

Personal Bankruptcy Rate). The shaded areas of Map 

1 indicate counties where nonbusiness bankruptcy rates 

were at least one standard deviation above the Regional average in 1998. These bankruptcy data imply potentially higher consumer credit risk in parts of Georgia, 

Alabama, and, to a lesser extent, Virginia. The level of 

debtor protection afforded under state law can have a 

large effect on the number of bankruptcy filings; how5 Twenty-two of the 70 banks met the FDIC’s definition of a “consumer lender” at year-end. 

MAP 1 

Counties with High Bankruptcy Rates and
 

Banks with High Consumer Loan


 Exposures Are Concentrated in Georgia,
 

Alabama, Virginia, and West Virginia
 

1st (highest) Yield Quartile 

2nd Yield Quartile 

3rd Yield Quartile 

4th (lowest) Yield Quartile 

County with a Personal 

Bankruptcy Rate at Least 

One Standard Deviation 

above the Regional Mean 

Source: Bureau of the Census, Administrative Offices of the U.S. District
 

Courts (Regional Financial Associates)
 

ever, a higher propensity for bankruptcy in certain markets nonetheless may portend increased risk to local 

consumer lenders. 

In addition to bankruptcies, consumer loan yields 

earned by banks in a particular area may provide some 

indication of the level of credit risk perceived by lenders 

in that market. This assumes, of course, that banks are 

able to overcome competitive pressures and price credits according to risk. Nonmortgage consumer loan 

yields for 58 of the 706 banks in the Atlanta Region with 

high exposure to this product are shown in Map 1. 

Grouping these banks into quartiles based on 1998 

yields, we found that more than half of the banks in the 

top yield quartile were headquartered in Georgia. No 

other state in the Region had more than two banks in the 

top quartile. This may mean that lenders in Georgia’s 

6 Banks that have assets under $25 million and file Call Report form 

034 do not report income from consumer loans as a separate item. 

Twelve of the 70 banks met these criteria; therefore, only 58 yields are 

shown in Map 1. 

Atlanta Regional Outlook 22 Second Quarter 1999 
Regional Perspectives
 

high-bankruptcy areas recognize, and charge for, potentially higher consumer credit risk. But, if risk pricing is 

in effect, the fact that consumer loan yields at some 

Georgia banks were substantially higher than the 

Regional average could indicate aggressive risk taking 

by some institutions. At the opposite end of the spectrum, nearly half of the banks in the lowest-yield quartile were headquartered in Alabama, and all were either 

in or adjacent to counties with above-average personal 

bankruptcy rates. The presence of several low-yielding 

banks in areas where bankruptcies are high raises the 

question of whether those institutions are able to charge 

appropriately for credit risk in their consumer 

portfolios. However, a look at credit quality and overall 

performance measures at these low-yielding institutions 

as of year-end 1998 did not reveal any significant operating weakness. It is important to note that factors other 

than credit risk, such as geographic pricing patterns, 

differences in the types of consumer loan products 

offered, or differences in state usury laws may account 

for some of the variations in yields across the Region. 

For example, high usury limits in Georgia (capped at 60 

percent per annum) have attracted several credit card 

banks and nonbank consumer finance companies to the 

state. These higher interest rate limits also may foster an 

overall higher market rate of interest in Georgia, a situation that could help explain the concentration of high 

yields in the state. 

TABLE 2 

As a third potential indicator of consumer credit risk, in 

addition to bankruptcies and yields, we looked at household debt-to-income levels as determined by the 1998 

NDS survey of household finances (see Table 2). Consistent with the Region’s above-average nonmortgage 

consumer loan exposure summarized in Table 1, the 

NDS survey found that the average household in six of 

the seven states in the Atlanta Region had a nonmortgage debt-to-income ratio that was above the national 

average in 1998. The Region’s highest ratios of total 

household debt7-to-income were in Virginia, West Virginia, and Georgia, while the highest nonmortgage consumer debt-to-income ratios were reported in West 

Virginia and Alabama. Credit card debt-to-income levels were higher in West Virginia and Alabama as well. 

Households with high levels of debt relative to income 

may find it difficult to continue to service those debts in 

an economic downturn, especially in less economically 

diverse areas, where employment and income tend to be 

more sensitive to economic shocks. 

Consumer loan delinquencies and charge-offs validate, 

to some extent, the higher credit risks implied by the 

bankruptcy, yield, and debt-to-income data above. As 

7 The inclusion of credit card balances of “convenience” users may 

result in a slight overstatement of household debt. 

Nonmortgage Consumer Debt-to-Income Levels in the Atlanta 

Region Are above the U.S. Average 

TOTAL HOUSEHOLD DEBT NONMORTGAGE 

(INCLUDING MORTGAGES) CONSUMER DEBT TO CREDIT CARD DEBT TO 

TO HOUSEHOLD INCOME HOUSEHOLD INCOME HOUSEHOLD INCOME 

STATE (%) (%) (%) 

WEST VIRGINIA 65.9 20.1 4.3 

ALABAMA 63.7 18.2 4.0 

SOUTH CAROLINA 64.2 17.6 3.9 

NORTH CAROLINA 64.0 16.9 3.7 

FLORIDA 64.4 16.7 3.9 

GEORGIA 65.7 16.5 3.8 

VIRGINIA 73.5 16.2 3.7 

ATLANTA REGION 66.0 16.9 3.8 

U.S. 68.5 16.3 3.8 

Household debt includes all bank and nonbank borrowings. Ratios reflect a debt-equivalent balance for auto lease 

obligations, calculated from NDS survey data. 

Source: National Decision Systems 1998 Survey of Household Finances 

Atlanta Regional Outlook 23 Second Quarter 1999 
Regional Perspectives
 

shown in Table 3, the charge-off rate among the 20 Georgia banks with significant nonmortgage consumer loan 

exposure was very high, at 4.08 percent in 1998. While 

the ratio reflects large losses at a couple of banks, one in 

four banks reported consumer charge-offs in excess of 2 

percent, and nearly half incurred losses of more than 1 

percent for the year. This finding is consistent with the 

positive correlation between personal bankruptcies and 

consumer loan charge-offs referenced above. Meanwhile, Alabama reported the Region’s highest percentage of noncurrent consumer loans, 1.71 percent at year 

end, possibly linked to high personal bankruptcies and 

nonmortgage consumer debt-to-income levels. Although 

there were fewer counties with high bankruptcy rates in 

West Virginia, the state had the Region’s highest ratio of 

household nonmortgage debt-to-income and ranked 

third in terms of consumer loan delinquencies and 

charge-offs in 1998. Credit quality measures were 

stronger in Virginia despite several counties having 

bankruptcy rates above the Regional average. 

In addition to currently active nonmortgage consumer 

lenders, a number of commercial banks in the Atlanta 

Region that do not report high exposures have been 

increasing their consumer portfolio allocation. In some 

instances, given continued industrywide erosion of the 

net interest margin, this change in allocation could signal a strategic shift to an historically higher-risk loan 

TABLE 3 

type in search of higher yields. To identify institutions 

possibly moving into the consumer lending arena, we 

looked for a consumer loans-to-assets ratio of between 

10 and 20 percent that had increased by more than 100 

basis points in both 1997 and 1998. Twenty-five commercial banks in the Region met these criteria at yearend 1998. Most were concentrated in Georgia and 

Alabama, each with eight banks, while Virginia and 

West Virginia followed with three and two banks, 

respectively. 

The risk indicators discussed above—bankruptcies, 

yields, household debt-to-income levels, and delinquencies and charge-offs—imply potentially higher consumer credit risk in parts of Georgia, Alabama, West 

Virginia, and, to a lesser extent, Virginia. The Region’s 

most active consumer lenders with assets less than $1 

billion, as well as a majority of institutions that are 

approaching significant levels of consumer loan exposure, are concentrated largely in these same states. 

Given some weakening trends in consumer credit quality, particularly in light of the favorable current economic environment, it is important that institutions 

actively serving this sector maintain underwriting 

integrity, establish adequate reserves, and ensure sufficient monitoring and collection efforts. 

Atlanta Region Staff 

Banks with Significant Nonmortgage Consumer Loan 

Exposure Are Concentrated in Four States 

NONMORTGAGE NONMORTGAGE 

NONMORTGAGE NONMORTGAGE NONMORTGAGE CONSUMER CONSUMER 

CONSUMER CONSUMER CONSUMER LOANS LOAN 

LENDERS* LOANS LOAN YIELD NONCURRENT CHARGE-OFFS 

STATE (#) (% OF ASSETS) (%) (%) (%) 

GEORGIA 20 29.90 13.51 1.50 4.08 

VIRGINIA 16 29.10 8.87 0.54 0.52 

ALABAMA 12 23.66 8.86 1.71 1.20 

WEST VIRGINIA 11 23.88 8.95 0.83 1.50 

FLORIDA 6 30.39 9.98 0.81 1.31 

SOUTH CAROLINA 4 26.69 7.76 0.38 2.37 

NORTH CAROLINA 1 20.37 9.12 0.14 0.88 

* Insured commercial banks with a ratio of nonmortgage consumer loans to assets of 20 percent or more. 

Notes: Credit card banks, institutions with assets of more than $1 billion, and de novos open less than one year are 

excluded. Twenty-two of the 70 banks meet the FDIC’s definition of a “consumer lender,” which requires a ratio of 

total consumer loans, including residential mortgages, to assets of at least 50 percent. Noncurrent loans include 

loans past due 90 or more days and nonaccruals. Charge-offs are net of recoveries. 

Source: Bank Call Reports 

Atlanta Regional Outlook 24 Second Quarter 1999 
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