FEDERAL DEPOSIT INSURANCE CORPORATION FIRST QUARTER 1997
 

FDIC ATLANTA
 

REGION
 

DIVISION OF
 

INSURANCE
 

JACK M.W. PHELPS,
 

SENIOR REGIONAL
 

ANALYST
 

In Focus This Quaitei
 

• Consumers Declare Bankruptcy in Record Numbers - Despite 

favorable economic conditions, consumers are declaring bankruptcy in record numbers in the Atlanta Region. The increases in both personal bankruptcy filings and 

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

participants, regulators, and Congress. See page 3. 

• New Tax Benefits for Owners of Community Banks - The 

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

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

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

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

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

serious problems of the SAIF. See page 9. 

Regu[ai Featuies
 

+Regional Economy +Financial and +Regional Banking 

 Commodity Markets 

· Economic Diversity · Interest Rates · Recent Performance 

· Health Care · Bond Values · Loan Growth 

· Housing · Bank Stocks · SAIF Assessment 

· Office · New Products · Unprofitable Institutions

· Retail · Commodities

 See page 12 See page 16 See page 20 

A Publication of the Division of Insurance For Internal Use Only 

PROTOTYPE
 

Dear Reader, 

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

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

emerging risks to insured depository institutions. 

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

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

relate them to insured depository institutions. 

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

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

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

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

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

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

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

Sincerely, 

Arthur J. Murton 

Director 

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

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

Phelps at (404) 817-2590 or email him at Jack M.W. Phelps@DOI@Atlanta. 

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

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

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

Ricki Helfer, Chairman, Federal Deposit Insurance Corporation 

Arthur J. Murton, Director, Division of Insurance 

Editorial Board	 George E. French, Deputy Director 

Stephen Linehan, Assistant Director, Analysis Branch 

Ronald L. Spieker, Chief, Depository Institutions Analysis Section 

Maureen E. Sweeney, Special Assistant to the Director 

Design and Production	 Steven E. Cunningham, Senior Financial Analyst 

Diane Ellis, Senior Financial Analyst 

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

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

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

this publication. 

PROTOTYPE
 
 

 

 

 

 

 

 

 

 

 

 

In Focus This Quarter
 

Consumers Declare Bankruptcy in Record Numbers 

Trend Raises Concerns about Consumer Credit 

• 	 Despite favorable economic conditions, personal 

bankruptcy rates are rising throughout the Atlanta Region. 

• 	 Georgia, Alabama, and Virginia stand out among 

states in the Atlanta Region with the second, 

third, and seventh highest per capita bankruptcy 

rates in the country, respectively. 

• 	 Credit card charge-offs are approaching recession levels. 

Despite favorable economic conditions, consumers are 

declaring bankruptcy in record numbers in the Atlanta 

Region. The increases in both personal bankruptcy 

filings and consumer credit losses are part of a national 

trend which has the attention of industry participants, 

regulators, and Congress. Both the Senate and House 

Banking Committees have held hearings on the condition 

of consumer credit, particularly credit card lending. 

Much of the concern regarding these trends is due to the 

fact that bankruptcy filings and charge-offs are rising 

despite low unemployment and rising income levels. 

What Is Occurring in the Atlanta Region? 

Chart 1 shows the rising trend in consumer loan losses 

in the Atlanta Region as well as the relationship between charge-offs and personal bankruptcy filings. 

Table 1 shows that personal bankruptcy rates are rising 

CHART 1

in all states throughout the Region. Within the Atlanta 

Region, three states are ranked particularly high on a 

nationwide basis. Georgia is ranked number two, Alabama is ranked number three, and Virginia is ranked 

number seven in the number of bankruptcies filed. 

Why Are Consumer Credit Losses Rising in an 

Expanding Economy? 

The emergence of consumer credit problems during an 

expanding economy is not unprecedented. During the 

last economic expansion, consumer delinquency and 

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

when employment rises because households are more 

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

Chart 2 shows that past cycles of rising growth in 

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

As the expansion closes out its sixth year, American 

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

payments, including mortgage, to disposable personal 

income is approaching record highs and is currently at 

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

several years of economic expansion along with credit 

card companies’ intensive efforts to generate and feed 

consumers’ appetite for credit. Consumers and their 

lenders are now experiencing the after-effects of this 

credit expansion. 

CHART 2

Personal Bankruptices Correlate with 

Consumer Loan Charge-offs in the Region 

Filings 

(000s) 

2.5% 60 

2.0% 

40 1.5% 

1.0% 20 Gross Charge-off Rates 0.5% 

0.0% 0 

91 92 93 94 95 96 

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

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

Research and Statistics. 

U.S. Consumer Delinquency Rate Tends to 

Rise After Credit Growth Accelerates 

ABA Composite % Change in 

Delinquency Rate Consumer Loans 

30% 2.7% 

2.5% 20% 

2.3% 10% 

2.1% 

0% 1.9% 

1.7% -10% 

80 82 84 86 88 90 92 94 96 

Sources: American Bankers Association and Federal Reserve Flow of 

Funds 

Regional Outlook	 3 First Quarter 1997 

PROTOTYPE
 

 

 

 

 

 

 

 

In Focus This Quarter
 

Why Are Bankruptcy Rates Rising? 

Nonbusiness bankruptcy filings for 1996 will exceed 

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

is 11 percent higher than the peak in the last recession 

and a 14 percent increase over 1995 filings. A variety 

of theories have been advanced to explain this trend. 

These theories include: 

• 	 Consumers have overextended themselves. 

• 	 Recent changes in bankruptcy laws make it easier to 

shield assets from creditors. 

• 	 Changes in legal practices promote bankruptcy. 

• 	 The social and financial repercussions associated 

with bankruptcy have diminished. 

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

many of which are interrelated. 

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

bankruptcy is driven by the number of and exposure to 

catastrophic events. For example, divorce is often a 

financial calamity leading people to bankruptcy court 

and is associated with high personal filing rates throughout the country. The report identifies other factors 

driving up bankruptcy rates such as: 

• 	 inadequate health insurance; 

• 	 inadequate auto insurance; 

• 	 a large percentage of self-employed workers; 

• 	 garnishment of wages; and, 

TABLE 1

• 	 high debt-to-income ratios. 

All of these conditions increase consumers’ exposure to 

catastrophic events, such as job loss, that are typically 

associated with personal bankruptcy. 

Of interest to lenders is that some traditional early 

warning signs of trouble -- such as erratic missed 

payments or paying off a smaller share of outstanding 

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

finding that obligations due to them are being wiped 

out in bankruptcy court on accounts that showed no 

prior problems. 

Implications for Insured Institutions 

These trends have raised concerns about the outlook for 

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

credit card charge-offs are approaching levels not seen 

since the aftermath of the 1990-1991 recession. During 

that recession, charge-off rates increased sharply. The 

question arises whether there would be a similar sharp 

increase in credit card losses during a future recession, 

driving credit card loss rates to levels well above their 

previous peak. 

This concern is heightened by a number of factors. 

Consumer debt burdens are at historic highs. Profit 

margins for the nation’s specialty credit card lenders 

(institutions whose total loans exceed 50 percent of 

managed assets and whose credit card loans exceed 50 

percent of total loans) have rapidly narrowed from a 

BANKRUPTCY RATES PER THOUSAND PERSONS

ALABAMA

FLORIDA

GEORGIA

NORTH CAROLINA

SOUTH CAROLINA

VIRGINIA

IEST VIRGINIA

UNITED STATES

1990 1991 1992 1993 1994 1995 3RD QTR

1996

ANNUAL.

3RD Q 96

STATE

RANKING

6.55 6.65 6.18 5.56 5.41

2.97 3.55 3.63 2.92 2.88

7.12 7.06 6.42 5.64 5.59

2.09 2.31 2.02 1.74 1.78

1.71 1.91 1.97 1.74 1.73

3.25 3.95 4.15 3.63 3.44

1.83 2.12 2.24 1.82 1.84

3.12 3.46 3.52 3.15 3.00

6.10

3.10

6.16

2.11

1.94

4.08

2.13

3.33

7.11

3.87

7.15

2.83

2.48

5.07

2.95

4.15

3

25

2

40

43

7

36

NA

Source: Bankruptcies - Administrative Office of the United States Courts

 Population - Census Bureau 

Regional Outlook	 4 First Quarter 1997 

PROTOTYPE
 

 

 

 

 

 

 

In Focus This Quarter
 

4.25 percent quarterly return on assets (ROA) in the 

third quarter of 1994 to a 2.02 percent quarterly ROA in 

the third quarter of this year. Competitive pressures on 

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

are few signs of any slackening of price competition. A 

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

credit card lenders, is a recent salvo in this price 

competition. Lenders also place great reliance on 

credit scoring models that have not yet been tested in 

a recession and, according to a recent Federal Reserve 

survey, appear overly optimistic in almost two-thirds of 

the banks surveyed. 

Other factors mitigate these concerns to some extent. 

Pricing of credit card loans has traditionally built in a 

margin of comfort for high and volatile losses. Loan 

portfolios are diversified with many small loans to 

individuals. There are preliminary indications that 

lenders and borrowers are retrenching to some extent. 

Consumer credit growth slowed from over 14 percent in 

both 1994 and 1995 to an annualized rate of 8 percent 

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

the Federal Reserve survey just mentioned two-thirds of 

banks reported raising the score an applicant must 

achieve to qualify for credit, and one-third reduced 

credit limits for existing customers. 

Generalizations about the outlook for credit card lending 

are difficult. Trends that describe the industry on 

average may not hold true for particular institutions. 

Performance is likely to vary substantially, with results 

CHART 3

U.S.Credit Card Charge-Offs Are
 

Approaching Levels Not Seen 

Since the Last Recession
 

5.0
 

4.5
 

4.0
 

3.5
 

3.0
 

2.5
 

Source: Federal Reserve Board 

Recession 

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

outlined above, credit card lending practices appear 

worthy of continued close attention by bankers and 

regulatory agencies. 

Diane Ellis, Senior Financial Analyst 

Jack M. W. Phelps, Senior Regional Analyst 

8687888990919293949596 

Regional Outlook 5 First Quarter 1997 

PROTOTYPE
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

In Focus This Quarter
 

New Tax Benefits for Owners of Community Banks 

Subchapter “S” Benefits Now Available 

• 	 Potential benefits are substantial. A layer of tax 

expense has been eliminated. 

• 	 Eligibility is restricted and requires care to maintain. 

• 	 While no application to the banking agencies is 

required, the new tax structure has supervisory 

implications. 

• 	 The new tax structure has some potential drawbacks. 

Introduction 

The Small Business Job Protection Act of 1996 allows 

closely held banks, thrifts and holding companies to take 

advantage of various pass-through benefits of the subchapter “S” corporation tax structure. These benefits 

are potentially substantial and may increase the inherent 

value of community banks. 

Eligibility Is Restricted 

The new law allows, for the first time, financial institutions including banks, thrifts, and holding companies to 

elect subchapter “S” status if they meet several criteria. 

The most important of these requirements are that the 

TABLE 1

company not use the reserve method of accounting 

for bad debts for tax purposes and that it have 75 or 

fewer eligible shareholders. All shareholders must 

consent to the subchapter “S” election and the IRS 

must consent to any change in the tax accounting for 

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

year 1997, institutions need to meet all the requirements by year-end 1996. 

Reserve accounting for Industry observers bad debts for tax purposes have suggested that is an issue affecting only over 1,000 banks smaller institutions. Cur- nationwide will 

rently, reserve accounting make the is allowed only for those subchapter “S” thrifts and banks under election. $500 million in assets that 

are not part of a group 

with more than $500 million in assets. To elect the new tax status, the subchapter “S” company will need to make the accounting 

change to the specific charge-off method for tax purposes. Presumably, the IRS will not object to any 

such change, which can delay deductions and increase 

taxable income, and will allow the change to be 

effective as of the beginning of the tax year. 

In relation to shareholder eligibility, ownership of 

subchapter “S” corporations is limited to individuals, 

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

shareholders, such as corporations, Employee Stock 

NUMBER OF BANKS WITH UNDER $100 MILLION IN TOTAL ASSETS

NATIONAL NON•MEMBER STATE

MEMBER

TOTAL

ALABAMA

FLORIDA

GEORGIA

NORTH CAROLINA

SOUTH CAROLINA

VIRGINIA

IEST VIRGINIA

21 87

40 95

28 206

2 15

13 34

9 15

20 35

17

30

3

0

3

40

13

125

165

237

17

50

64

68

TOTAL 133 487 106 726

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

Regional Outlook	 6 First Quarter 1997 

PROTOTYPE
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

In Focus This Quarter
 

Ownership Plans (ESOPs) and other stock bonus plans, 

may not hold shares in subchapter “S” corporations. 

Once the subchapter “S” election is taken, the corporation and its shareholders must take care to continue to 

meet all eligibility requirements or risk losing the tax 

benefits. 

Number of Eligible Institutions 

While exact figures on the number of eligible institutions 

are not available, the number of small banks may provide insight into where the tax election may be seen. As 

Table 1 (previous page) shows, there are about 726 

commercial banks in FDIC’s Atlanta Region with under 

$100 million in assets. Table 2 shows there are about 

354 commercial banks with under $50 million in assets. 

It is expected that a large percentage of these companies 

would meet the eligibility requirements. Some industry 

observers have suggested that over 1,000 banks nationwide will make the Subchapter “S” election. 

Benefits to Shareholders 

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

those of a partnership. The earnings of the corporation 

generally are not taxed at the corporate level but pass 

directly to shareholders’ personal income. As such, 

cash distributions to shareholders are not subject to 

an additional layer of taxation, which results in a 

reduction in overall taxes. Shareholders remain liable 

for personal taxes on their proportionate share of the 

corporation’s taxable income. Distributions formerly 

paid directly to the IRS by the institution generally 

TABLE 2

would be made to the shareholders, providing them with 

the funds to pay income taxes on their share of the 

corporate income. An interagency letter, FIL-91-96 

dated October 29, 1996, notes that these distributions 

will be treated as dividends by the regulatory agencies. 

Adding value and flexibility to the “S” corporation 

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

bank or savings association subsidiaries to be “S” 

corporations. 

Other Tax Liabilities 

For bank or thrift companies that elect to convert to “S” 

corporation status, there are potentially some other corporate tax liabilities for unrealized gains accumulated 

through the date of conversion. As an example, should 

the fair market value of all company assets exceed the 

adjusted tax bases of these assets, there may be some 

corporate tax liability if any assets are later sold. Assets held on conversion date and sold within the next ten 

years require a calculation for “Built-in Gains Tax” 

(BIG tax) to determine any tax at the corporate level. 

Supervisory Implications 

While an application to bank regulators is not required 

for this tax election, there may be a rise in various 

“phantom bank mergers” or change-in-control applications as companies work to meet shareholder number 

requirements or attempt to get the required 100 percent 

shareholder approval. 

NUMBER OF BANKS WITH UNDER $50 MILLION IN TOTAL ASSETS

NATIONAL NON•MEMBER STATE

MEMBER

TOTAL

ALABAMA

FLORIDA

GEORGIA

NORTH CAROLINA

SOUTH CAROLINA

VIRGINIA

IEST VIRGINIA

10 50

15 47

10 107

1 7

6 19

5 8

5 20

10

13

2

0

2

13

4

70

75

119

8

27

26

29

TOTAL 52 258 44 354

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

Regional Outlook 7 First Quarter 1997 

PROTOTYPE
 

 

 

 

 

 

 

 

 

 

 

 

 

 

In Focus This Quarter
 

Shareholders may enter agreements that place limits 

on their ability to sell their stock. In addition, the 

mechanics of a conversion will require some special 

expertise for the bank in tax law and accounting. The 

change from the reserve method to the specific chargeoff method for bad debts or the existence of net operating losses may present unique circumstances for each 

institution. 

Bank portfolios also may undergo changes prompted 

by shareholders’ requests. An example might be increased purchases of tax-free securities to meet the 

desires of shareholders for more tax-free interest. Another may arise from a tendency to remove accumulated 

earnings to pay personal taxes as the corporation generates earnings. This could place a strain on capital in 

situations where growth is strong or delinquent assets 

are rising. 

Other Drawbacks 

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

the institution will need to meet all the eligibility requirements for every day of the tax year. Furthermore, 

the IRS has not yet resolved all the tax issues related to 

the subchapter “S” election on the part of financial 

institutions. Specific guidelines from the IRS are expected by year-end 1996 which may affect an institution’s decision to elect subchapter “S” status. 

The states of Connecticut, Michigan, New Hampshire, 

New Jersey, Tennessee as well as the District of 

Columbia do not recognize the federal subchapter “S” 

election. Therefore, these jurisdictions do not allow the 

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

applicable state or district taxes. 

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

other institutions. However, there are times when it may 

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

example would arise when an institution needs to raise 

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

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

of new capital. The ability to raise additional capital 

by attracting new eligible shareholders may be difficult 

because the total number of eligible shareholders must 

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

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

subchapter “S” status and reversion to regular corporate 

tax rules. 

Distributions to shareholders are covered by similar 

restrictions for subchapter “S” corporations as for regular corporations. However, There may be a rise in 

one possible new twist various “phantom 

bank mergers” or is that, in some cases, 

the tax liability payment change in control 

for shareholders may be applications as the 

due before distributions companies work to 

are funded from the in- meet shareholder 

stitution. However, this number requirements 

is considered similar to or attempt to get the 

pressures brought by required 100 percent 

shareholders in other shareholder approval. 

corporations when they 

require dividend payments to fund debt payments on stock loans. 

New Value for the Community Bank Charter 

Overall, this newly legislated tax break for closelyheld financial institutions may invigorate the value of 

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

new “wrinkle” in the complexity of the examiner’s 

job. While consolidation trends can be expected to 

continue at larger companies, the new tax benefits 

available for closely-held institutions add a new incentive for the survival of community banks and 

thrifts. 

Ronald L. Spieker, Chief, 

Depository Institutions Analysis Section * 

For More Information 

Subchapter S Election for Federal Income Taxes. 

FIL-91-96. 

* Extensive review and comments were provided by Robert F. 

Storch, Chief, Accounting Section of the Division of Supervision. 

Regional Outlook 8 First Quarter 1997 

PROTOTYPE
 

 

 

 

 

 

 

 

 

 

In Focus This Quarter
 

Savings Association Insurance Fund (SAIF)

 Capitalized
 FDIC Lowers Assessment Rates 

• 	 SAIF was capitalized through a $4.5 billion 

special assessment. Almost 400 banks and 

thrifts in the Atlanta Region paid $650 million 

of this total. 

• 	 Bank Insurance Fund (BIF) members will bear 

part of the cost of the Financing Corporation 

(FICO) bonds beginning in 1997. 

• 	 The special assessment negatively affects 1996 

operating performance, but earnings prospects 

are greatly enhanced by a proposal to lower 

future SAIF assessment rates. 

Why Was Action Needed? 

After more than two years of hard work by regulators, 

Congress, and the banking and thrift industries, the 

Deposit Insurance Funds Act of 1996 (Act) was 

passed to address the serious problems of the SAIF. 

The difficulties facing the SAIF were substantial and 

demanded a solution. They primarily fell into the 

following areas: 

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

TABLE 1

failures could quickly deplete the fund balance. 

Its balance was $3.9 billion, or 0.55 percent of 

insured deposits, on June 30, 1996, well below 

the target reserve ratio of 1.25 percent of insured 

deposits. 

• 	 Over 45 percent of 

SAIF assessments 

were being diverted About 85 percent of 

from the SAIF to pay the Atlanta Region’s 

off FICO obligations institutions paying 

arising from the thrift the special 

failures of the 1980s. assessment posted a 

quarterly net 

• 	 The SAIF assessment operating loss for base continued to the third quarter of shrink, with a 22 per- 1996 ... cent reduction noted
 

from year-end 1989
 

to June of 1996.
 

• 	 Disparity between SAIF and BIF premiums created strong economic incentives for institutions to 

transfer SAIF-assessable deposits to affiliated 

institutions insured by the BIF, contributing to the 

shrinkage in the SAIF assessment base. 

What Significant Actions Were Taken? 

ATLANTA REGION INSTITUTIONS AFFECTED BY SAIF SPECIAL ASSESSMENT

NUMBER OF INSTITUTIONS

AFFECTED AND TOTAL

ASSESSMENT BY TYPE

MUTUAL SAVINGS S&L STATE NATIONAL

BANKS MEMBER

NON•

MEMBER

TOTAL

ALABAMA

FLORIDA

GEORGIA

NORTH CAROLINA

SOUTH CAROLINA

VIRGINIA

IEST VIRGINIA

0

0

0

39

0

1

0

11

49

23

6

12

23

7

6

12

11

16

20

6

2

5

9

6

1

0

14

0

2

14

13

3

5

6

6

11

14

14

11

4

2

3

35

98

67

76

41

52

18

TOTAL 40 131 73 35 49 59 387

ASSESSMENT ($000S) 20,805 183,097 59,332 63,275 246,114 76,854 650,287

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

Regional Outlook	 9 First Quarter 1997 

PROTOTYPE
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

In Focus This Quarter
 

Special Assessment: In order to address the immediate 

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

65.7 basis points on SAIF-member institutions. The 

special assessment was designed to increase the fund’s 

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

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

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

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

insured by the other fund. The acquired deposits 

retain coverage under the seller’s fund.) 

Early estimates are that there will be fewer than ten 

exempted institutions in the Atlanta Region. This 

number of exempted institutions is small compared with 

the estimated 387 institutions in the Region that paid 

about $650 million to the SAIF in November. As 

Table 1 (previous page) indicates, the special assessment affects more than just thrifts. This is due to the 

substantial number of banks that have acquired SAIF 

TABLE 2

deposits through acquisitions or branch purchases over 

the last few years. 

FICO Costs: The recently enacted legislation also 

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

shore up the former Federal Savings and Loan Insurance 

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

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

SAIF had not improved as quickly as the BIF. 

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

that were already being assessed. The FICO charge on 

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

SAIF assessable deposits. As a result, the FICO 

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

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

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

necessary, FICO rates will be adjusted on a quarterly 

basis to reflect changes in the assessable-deposit bases 

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

or, when the insurance funds merge, whichever occurs 

earlier, BIF and SAIF members will share the FICO 

assessment on a pro rata basis. (FICO assessments will 

be paid in addition to the deposit insurance assessments. 

See discussion below.) 

Regional Outlook 10 First Quarter 1997 

Final Rule to Lower SAIF Assessment Rates: With 

the SAIF now capitalized by the special assessment, the 

FDIC Board of Directors lowered the rates on ongoing 

assessments paid to the SAIF. The Board also widened 

the spread between the lowest and highest rates to 

improve the effectiveness of the FDIC’s risk-based 

premium system. 

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

institutions beginning January 1, 1997. (Since only 

SAIF-member savings associations must, by law, pay 

for FICO assessments until the end of 1996, a special 

interim rate was established for SAIF-member savings 

associations for the last quarter of 1996.) 

As is noted in Table 2, institutions exempted from 

paying the special assessment will not benefit initially 

from the lower SAIF assessment rates. They will pay 

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

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

payment of the special assessment in the interim. 

SUMMARY OF 1997 ASSESSMENT

RATES *

1997 ADJUSTED BIF & SAIF SCHEDULE

CAPITAL SUPERVISORY SUBGROUP

GROUP A B C

1 0 3 17

2 3 10 24

3 10 24 27

EXEMPT INSTITUTION SAIF SCHEDULE

1 23 26 29

2 26 29 30

3 29 30 31

FICO ANNUAL RATES

BIF INSTITUTIONS SAIF INSTITUTIONS

1.30 6.48

* CENTS PER $100 OF DOMESTIC DEPOSITS

SOURCE: FDIC'S DIVISION OF INSURANCE

PROTOTYPE
 
 

 

 

 

 

 

 

 

 

 

 

In Focus This Quarter
 

Implications for Insured Institutions 

Institutions that are required to pay the SAIF special 

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

As a result, many such institutions will reflect much 

lower operating earnings this year. In fact, over 85 

percent of the Atlanta Region’s institutions paying the 

special assessment posted a quarterly net operating loss 

for the third quarter of 1996 primarily due to the special 

assessment. 

Concerns over the short-term financial impact described 

above are moderated by much brighter future prospects. 

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

should not affect future earnings streams of nonexempt 

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

1997. Finally, some observers have noted that the 

resolution of the SAIF’s deficiencies should remove 

uncertainties that may have depressed stock prices of 

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

capitalization of the SAIF and the change in assessment 

rates also pave the way for a dialogue about a possible 

merger of the two deposit insurance funds. 

John D. Weier, Chicago Senior Regional Analyst 

For More Information 

• 	 SAIF Assessments. FIL-88-96 

• 	 Accounting for the SAIF Special Assessment and 

FICO Assessments. FIL-90-96 

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

Assessments. 

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

Proposed Rules - Assessments. 

• Press Release 79-1996 and 63-1996. 

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

October 28, 1996. 

Regional Outlook	 11 First Quarter 1997 

PROTOTYPE
 

 

 

Regular Features	 The Regional Economy
 

Atlanta Region -- A Diverse and Growing Economy
 

• 	 State economies in the Region are very diverse -- from West Virginia’s coal mines and blast furnaces, to 

Florida’s draw as a tourism and retirement area. According to at least one forecast, the Region generally 

should outperform the nation in 1997. 

• 	 Health care is a dominant part of the landscape in most states in the Region and may pose a risk to some 

economies if ongoing consolidation in the industry adversely affects employment. 

• 	 A mix of cyclical industries, such as textiles and chemicals manufacturing, and less-cyclical ones, such as 

health care and food and beverage manufacturing, should cushion the Region to some extent against a national slowdown. 

• 	 Real estate markets have been booming and providing significant job and income growth. Housing markets may decline modestly in 1997, in keeping with national trends, while commercial markets should conDiversity Provides Stability 

The seven states within the Region have very diverse 

fortunes, from Florida -- with a third of the Region’s 

population and income -- to West Virginia, with four 

percent of the Atlanta Region’s population and just three 

percent of its income. Table 1 ranks the states based on 

their relative importance to the regional economy. Data 

are for 1995, except for South Carolina (1994). 

The Atlanta Region continues to draw companies in 

growing industries, particularly business services (e.g., 

accounting, personnel-supply, data processing), given 

its favorable climate and low cost of doing business. 

As indicated in Table 2 below, the Region also maintains a significant manufacturing base centered in the 

Carolinas. 

Population growth has remained steady and continues 

to contribute to job and wealth creation for most 

states in the Region. Despite the inflow of new residents, unemployment rates generally have remained 

low. 

For the Region as a whole, nonfarm employment growth 

slowed somewhat during the first ten months of 1996 but 

held on to a respectable 2.5 percent gain over the same 

period in 1995. For the first ten months of 1996, 

Florida’s job base grew 3 percent after a 3.6 percent 

advance in 1995 and gains of 4 percent in both 1993 and 

1994. Across the Region, job growth was strongest in 

Georgia, at nearly 4 percent, and weakest in Alabama, at 

just under 1 percent. As in the nation, service-sector 

jobs have been providing most of the new employment 

opportunities in the Region during the 1990s. 

Many private-sector estimates call for continued modest 

growth in the U.S. economy during 1997. Forecasts by 

TABLE 1	 TABLE 2
 

ATLANTA REGION IS DOMINATED BY

FLORIDA

SHARE OF

POPULATION

(PERCENT)

SHARE OF

INCOME

(PERCENT)

FLORIDA

GEORGIA

NORTH CAROLINA

VIRGINIA

ALABAMA

SOUTH CAROLINA

WEST VIRGINIA

31.5

16.0

16.0

14.7

9.5

8.2

4.1

33.6

16.1

15.7

16.0

8.3

7.0

3.3

SOURCE: U.S. CENSUS BUREAU

CAROLINAS LEAD IN MANUFACTURING,

FLORIDA & VIRGINIA IN SERVICES

PERCENT OF 1995 INCOME

MANUFACTURING SERVICES

FLORIDA

GEORGIA

NORTH CAROLINA

VIRGINIA

ALABAMA

SOUTH CAROLINA

WEST VIRGINIA

9.4 33.2

17.4 25.1

25.5 21.2

14.0 28.2

22.8 22.5

34.9 26.4

16.4 24.0

SOURCE: U.S. CENSUS BUREAU

Regional Outlook	 12 First Quarter 1997 

PROTOTYPE
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Regular Features The Regional Economy
 

TABLE 3
 

FLORIDA AND GEORGIA ECONOMIES SLOW

BUT STILL OUTPACE THE NATION

FORECASTED GROWTH OVER

 PRIOR YEAR, PERCENT

GROSS PRODUCT

NONFARM

EMPLOYMENT

1996 1997 1996 1997

FLORIDA

VIRGINIA

GEORGIA

SOUTH CAROLINA

WEST VIRGINIA

NORTH CAROLINA

3.5

2.2

4.3

2.0

2.5

2.3

3.2

2.9

2.8

2.8

2.7

2.5

2.9 2.7

1.6 2.1

3.5 1.7

2.0 2.2

1.5 0.9

1.6 1.6

U.S. 2.3 2.5 2.0 1.5

ALABAMA 1.2 2.2 0.7 1.1

SOURCE: REGIONAL FINANCIAL ASSOCIATES

Regional Financial Associates (RFA) look for an increase in Gross Domestic Product of 2.5 percent, accompanied by a gain of 1.5 percent in nonfarm jobs. 

Table 3 presents RFA’s estimates for 1996 and 1997 

forecasts for the Region’s states. Although both Florida 

and Georgia (half the Region’s economy) may see a 

slowdown in growth during 1997, they should still 

exceed the nation in gross (state) product and job gains. 

Only Alabama is expected to underperform the nation in 

gross product, while Alabama and West Virginia seem 

the most likely to underperform in terms of job formation. 

Implications: A diverse economy should cushion the 

Region somewhat in the event of a national slowdown. 

Although the Region is home to many cyclical and 

commodity industries (e.g., agriculture, chemicals, paper products, and textiles), more stable industries, such 

as business services, health care, and consumernoncyclical manufacturing, also are widely represented. 

This diversity will help to stabilize credit quality to the 

extent that the Region’s lending institutions have commercial and industrial loan portfolios that are similarly 

well-diversified across cyclical and less-cyclical businesses. A diverse employment base will provide more 

stability in consumer credit quality as well. 

Health Care Is a Significant Wealth Creator 

Health care and business services have dominated 

recent growth in jobs and income. In all but one of the 

Region’s seven states, health care (e.g., doctors offices 

and clinics, hospitals, nursing 

homes, etc.) accounted for at least 

one-third of state income derived 

from services in 1995. Table 4 

provides state rankings of health 

care’s share of income (data for 

South Carolina are for 1994). 

Implications: With the share of state income from 

health care services rivaling income from other sectors, the potential exists for this industry to negatively affect the regional economy if ongoing consolidation results in large job losses. Lending institutions’ consumer credit portfolios may deteriorate in 

direct proportion to the extent of their exposure to 

laid-off health care workers. Also, consolidation will 

put downward pressure on doctors and professionals’ 

incomes, which might impact their ability to repay 

outstanding debts. Smaller health care companies, 

meanwhile, could be driven out of business by larger 

rivals, directly impacting their ability to repay outstanding bank loans. 

Strength in Real Estate 

Housing Market Hitting New Highs (Except in the 

Virginias): For the most part, housing markets across 

the Region are doing very well. Strong growth was 

seen in most areas through the second quarter of 1996, 

although some declines occurred in the third quarter. 

Sales of existing homes in Florida rose 5.5 percent 

between the fourth quarter of 1995 and the third quarter 

of 1996, to a seasonally-adjusted annual level of 

240,000. In North Carolina, the Region’s second 

TABLE 4

HEALTH CARE'S IMPORTANCE

TO THE REGION

PERCENT OF

STATE INCOME

PERCENT OF

SERVICES

INCOME

FLORIDA

SOUTH CAROLINA

WEST VIRGINIA

ALABAMA

GEORGIA

NORTH CAROLINA

VIRGINIA

11.4

11.4

11.2

8.6

7.9

7.6

7.1

34.3

43.0

46.7

38.2

31.5

35.8

25.2

SOURCE: U.S. CENSUS BUREAU

Regional Outlook 13 First Quarter 1997 

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Regular Features The Regional Economy
 

CHART 1
 

0 

50 

100 

150 

200 

250 

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

Source: National Association of Realtors 

Region's Home Resales Continue Upward 

(Thousands, seasonally adjusted annual rates) 

Florida 

North Carolina 

largest housing market, sales reached a seasonallyadjusted annual level of 221,000 in the third quarter, up 

almost 8 percent from the end of 1995 (see Chart 1). 

In many of the Region’s metro areas, such as Birmingham and Mobile (AL), Jacksonville (FL), Richmond 

(VA), Greenville and Charlotte (NC), and Charleston 

(WV), median resale prices have risen by double digits 

in 1996. 

Implications: The National Association of Realtors 

expects U.S. existing home sales to slip to 3.8 million in 

1997 from their record pace of 4.1 million achieved in 

TABLE 5

1996. Except for some of the hottest markets in the 

Carolinas and Florida, home sales may also cool 

slightly in the Region during 1997 -- although they will 

remain at relatively high levels. 

According to the FDIC Real 

Estate Report, the Atlanta Region has the highest proportion 

of assets invested in singlefamily mortgages. For example, 

Florida and West Virginia institutions have one quarter of their total assets in single-family mortgages. A 

cooling in home-sales growth would be expected to 

adversely affect revenues from mortgage originations. 

Commercial Markets Strong: Commercial real 

estate development has had a significant impact on 

the Atlanta Region’s economic performance in recent years. A strong inflow of service businesses, not 

to mention the recent Olympic Games, increased demand for office and industrial properties. For most 

states in the Region, construction accounts for about 6 

to 7 percent of labor income, versus a 5 percent 

average for the nation. 

In 1995, the value of new commercial building permits rose in every state except West Virginia. Planned 

commercial building activity remains robust in most 

markets, particularly those in Florida and in the ReWHILE IMPROVED, SOME MARKETS' VACANCY RATES STILL EXCEED NATIONAL AVERAGE

PERCENTAGE OF AVAILABLE SPACE UNOCCUPIED

DURING THIRD QUARTER 1996

INDUSTRIAL OFFICE DOWNTOWN OFFICE SUBURBAN OFFICE

U.S. AVERAGE 7.7 12.8 14.4 11.7

FLORIDA

 MIAMI

 TAMPA

 PALM BEACH

 JACKSONVILLE

 ORLANDO

 FT. LAUDERDALE

7.6 15.0 20.6 11.7

9.7 13.1 20.7 10.7

1.7 12.1 N/A 12.1

3.5 10.8 13.5 8.0

8.9 9.5 7.0 10.5

6.5 9.2 5.3 10.2

GEORGIA

 ATLANTA 12.4 9.5 15.1 8.0

NORTH CAROLINA

 CHARLOTTE 6.3 7.5 5.7 8.9

NOTE: DATA ARE AVERAGE FOR THE PERIOD.

SOURCE: CB COMMERCIAL

Regional Outlook 14 First Quarter 1997 

PROTOTYPE
 

 

 

 

 

 

 

 

 

 

 

 

 

Regular Features The Regional Economy
 

gion’s major metro areas, like Atlanta. The market 

around Atlanta already has begun to experience a 

post-Olympic slowdown, but continued in-migration 

of service-sector firms should help to mitigate any 

decline in demand for the area’s commercial and 

office real estate in 1997. Table 5 (previous page) 

provides recent vacancy rate information for some of 

the Region’s larger metropolitan markets. 

Office: Vacancy rates continued to fall and in many 

metro areas achieved ten-year lows in 1996. Much 

improvement has occurred in Atlanta and in some 

long-troubled Florida markets (which saw vacancy 

rates well above 20 percent in the early 1990s). 

However, massive overbuilding in markets like Miami and Tampa have led to persistently high vacancy 

rates. 

Florida’s many metro areas continue to have significant new office 

space in the planning stages. According to the FDIC’s Division of 

Research and Statistics, the largest 

additions would occur in Fort 

Lauderdale and West Palm Beach 

(over 2 million square feet each, or 11 to 12 percent of 

existing inventory), Tampa (2.6 million square feet, or 

10 percent of current inventory), and Jacksonville 

(almost 4 million square feet -- a 30 percent increase 

in existing inventory). Miami and Orlando have more 

conservative additions planned -- totaling about 1.5 

million square feet each. These plans would add 

another 5 percent to Miami’s inventory of office 

space, while increasing inventories in Orlando by 

roughly 8 percent. 

Atlanta had some of the largest planned additions to 

office space as of last August -- over 7 million square 

feet, or 8 percent of total inventory as of mid-1996. 

Charlotte and Raleigh (NC) also were expecting 2 to 

3 million more square feet of new office space sometime in the future. For Charlotte (data were not 

available for Raleigh), these additions would increase 

supply by about 12 percent. 

Retail: With higher levels of retail employment, new 

additions to space appeared in 1996. Vacancy rates 

were mostly below 10 percent in many of the Region’s 

metro areas -- matching or beating the 7 percent 

national average in Birmingham, Atlanta, Charlotte, 

Miami, and Raleigh-Durham. However, vacancy 

rates in Norfolk (VA), Greenville-Spartanburg (SC), 

Jacksonville, and West Palm 

Beach were all approximately 

11 percent during the second 

quarter of 1996. 

As of August 1996, the largest 

planned additions to retail space were in Atlanta, 

Miami, Tampa, West Palm Beach, Jacksonville, Orlando, Norfolk, Raleigh and Charlotte. Several 

Florida metro areas had also planned sizable new 

additions to other commercial space last August, including Fort Lauderdale, Miami, Jacksonville, and 

West Palm Beach. 

Implications: Persistently high office vacancy rates 

in some Florida markets this late in the business 

cycle are a risk. With a significant portion of regional 

institutions’ assets in these markets, caution is warranted. 

Norman Williams, Boston Regional Economist 

Regional Outlook 15 First Quarter 1997 

PROTOTYPE
 

 

 

 

 

 

 

 

 

 

Regular Features	 Financial and Commodity Markets
 

Financial and Commodity Markets
 

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

• 	 The Atlanta Region’s stock index has outperformed the S&P 500 so far this year, but it has underperformed the S&P Composite Bank Index. 

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

bank stock performance relative to the broader market. 

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

yield curve. 

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

Changes in Interest Rates and Bond Values CHART 1

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

then flattened this year. The 30-year Treasury yield 

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

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

fallen to 6.40 percent. 

To demonstrate the impact that interest rate fluctuations 

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

income portfolio, Table 1 presents three types of fixed 

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

callable FNMA Agency bond. The value of each bond 

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

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

each bond between those dates. 

Together the bonds lost nearly 5.27 percent of their 

value through July 1, 1996, but they recovered 2.74 

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

was down 2.68 percent. On an aggregate basis, the 

TABLE 1

Atlanta Region’s banks fared better. The value of securities holdings for all Call Report filers in the Region 

declined by 1.28 percent for the nine months ending in 

September. Obviously each institution’s investment 

portfolio performance will vary depending on the types 

of instruments held and the original acquisition price of 

The Treasury Yield Curve in 1996 

5.0 

5.5 

6.0 

6.5 

7.0 

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

11/25/96 

1/1/96 

7/1/96 

Source: Bloomberg 

Percent 

. 

EXAMPLE OF RECENT BOND PERFORMANCE

US TREASURY

30.YEAR BOND

$100,000 PAR

7.25% COUPON

7.75 YRS UNTIL MATURITY

FNMA

MORTGAGE PASS.THROUGH

$100,000 PAR

7.5% COUPON

7.59 YRS WAL

FNMA

CALLABLE AGENCY BOND

$100,000 PAR

7.55% COUPON

7.58 YRS UNTIL MATURITY TOTAL

DATE

11/25/96

7/1/96

1/1/96

SOURCE: Bloomberg 

PRICE

$107,375

$103,406

$111,281

CHANGE FROM

PRIOR PERIOD

3.84%

(7.08%)

PRICE

$100,280

$98,130

$102,110

CHANGE FROM

PRIOR PERIOD

2.19%

(3.90%)

PRICE

$102,240

$100,100

$105,020

CHANGE FROM

PRIOR PERIOD

2.14%

(4.68%)

PRICE

$309,895

$301,636

$318,411

CHANGE FROM

PRIOR PERIOD

2.74%

(5.27%)

Regional Outlook	 16 First Quarter 1997 

PROTOTYPE
 

 

 

 

 

 

 

 

 

 

 

 

Regular Features Financial and Commodity Markets
 

each instrument. 

The Atlanta Region’s Bank Stock Performance 

The stock market generally reacts 

unfavorably to rising interest rates, 

and reflecting this, the S&P 500 

gained only slightly more than 3 

percent through July (the latest peak 

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

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

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

performed well for most of the year, despite the 

period of rising rates that occurred during the first two 

quarters of 1996. 

The stellar performance of the money center banks this 

year -- with Citicorp and Chase Manhattan alone up 

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

Index to outperform indexes that track the performance 

of the Atlanta Region’s banks. The Atlanta Regional 

Bank Index (ARBI), created by the Division of Insurance (DOI), consists of the Atlanta Region’s 37 members of the American Banker Bank Index, which includes the 225 largest publicly-traded banks or bank 

holding companies. The ARBI, which is weighted by 

total market value of shares outstanding, has gained 

34 percent on the year, with performance closely 

tracking the S&P Bank Index. The ARBI shares its 

four largest institutions with the S&P Bank Index: 

Barnett Banks, First Union, NationsBank, SunTrust, 

and Wachovia. 

CHART 2
 

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

A recent study by Merrill Lynch suggests that the slope 

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

of near-term bank stock performance relative to the 

broader market. For the period 1950 through 1995, the 

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

percent of the time in the twelve months following a 

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

Treasuries. In contrast, the median underperformed the 

broader market 75 percent of the time in the twelve 

months following compression in the 5-year and 3-

month spread. Chart 3 on the following page plots this 

concept through 1995. 

The results of this study are intuitive. A steepening 

yield curve favors widening interest margins. The 

opposite is true as the yield curve flattens. 

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

previous year portend the recent strength in bank 

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

October 1996, bank stock performance relative to the 

broader market was strong despite a decline of nearly 

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

preceding twelve months. 

This recent departure from the historical pattern may 

have resulted from the market’s recognition of 

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

well as merger and acquisition activity. Also, bank 

stock performance has been buoyed by the use of excess 

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

The Atlanta Region's Banks Have Outperformed the S&P 500 

but not the S&P Bank Index 

-10% 

0% 

10% 

20% 

30% 

40% 

50% 

5-Jan

26-Jan

16-Feb

8-Mar

29-Mar

19-Apr

10-May31-May

21-Jun

12-Jul

2-Aug

23-Aug13-Sep

4-Oct

25-Oct

15-Nov

6-Dec 

Change from 1/01/96 

S&P Bank Index 

S&P 500 

Atlanta Regional Bank Index 

Sources: Bloomberg, American Banker 

Regional Outlook 17 First Quarter 1997 

PROTOTYPE
 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

Regular Features Financial and Commodity Markets
 

A New Product for Managing Exposures to 

Yield Curve Twists 

Managing earnings exposures to 

changes in the yield curve typically 

requires altering cash market positions, executing customized financial 

derivatives, or contracting multiple positions in 

exchange-traded derivatives instruments. Recently, 

the Chicago Board of Trade (CBOT) introduced new 

products that may eventually simplify managing this 

risk -- Yield Curve Spread Futures and Futures 

Options (YCSF). 

YCSF contracts are structured so the payoff changes 

only in response to changes in spreads between points 

along the Treasury yield curve, rather than shifts in the 

overall level of interest rates. These instruments may 

provide advantages over hedges involving multiple 

positions in interest rate derivatives that attempt to 

isolate spreads along the yield curve. Ten futures 

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

and 30-year maturity points were initially approved 

for trading. Options on these contracts also are 

traded. 

In theory, YCSFs could be used to construct hedges 

for specific interest-sensitive securities, or more 

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

a great degree of sophistication would likely be 

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

supervisory policy addressing financial derivatives. 

Initial trading in the YCSFs has been thin and for some 

CHART �

contracts non-existent. A CBOT representative indicated that position holders have been fairly diversified with most of the volume derived from speculators 

and traders for proprietary accounts. 

Favorable Forecasts, Fewer Exports Drive 

Grain Prices Lower 

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

near-record corn and soybean crops 

this year. Favorable weather during 

the late harvest pushed estimated corn 

production for the 1996/1997 crop 

year to 9.27 billion bushels -- the third 

best harvest behind those of 1992 and 

1994. The USDA expects strong corn yields over 

much of the Corn Belt and record yields in Nebraska, Kansas, and Missouri. Likewise, soybean 

production is forecast to total 2.4 billion bushels --

second only to the 1994 harvest. 

As expected, prices for corn continued to slide from 

their summer highs, which were driven by fears of 

supply shortages, late planting, and late harvest risks. 

Weaker corn and soybean prices, the second largest 

spring wheat harvest on record, and favorable weather 

conditions for the recently planted winter wheat crop 

also have softened wheat prices. (See Chart 4) Further compounding price declines has been a drop in 

demand from abroad as global competition heightens. 

Domestic corn and wheat producers are facing increased production, aggressive marketing, and foreign export subsidies from competitors including 

Argentina and the European Union. Soybean exports 

appear more favorable as Pacific Rim purchases of 

soybean meal to feed expanding livestock herds accelTwists in the Yield Curve Closely Correlate with 

Subsequent-Year Relative Bank Stock Performance 

-300 

-200 

-100 

0 

100 

200 

300 

196019661972197819841990 

5-year, 3-month Spread 

(bp) 

0 

40 

80 

120 

160 

Relative Bank Stock 

Performance 

(1953=100) 

--- Yield Curve Spread 

Sources: Merrill Lynch, Federal Reserve Board

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

Regional Outlook 18 First Quarter 1997 

PROTOTYPE
 

 

 

 

 

 

 

Regular Features Financial and Commodity Markets
 

CHART 4 TABLE 2
 

Prices R eceived by Farm ers 

Septem ber 1993 - O ctober 1996 

$0 

$1 

$2 

$3 

$4 

$5 

$6 

$7 

$8 

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

Per Bushel 

W heat Corn 

Soybeans 

Source : USDA

MAJOR COMMODITY RANKINGS

BASED ON 1994 CASH RECEIPTS

AL FL 'A N C SC !A W !

BRIOLERS 1 1 1 1 1 1

CATTLE 2 5 4 2 2

NURSERY 5 2 4 3

TOBACCO 3 2 5

CHICKEN EGGS 3 4 5

COTTON 4 3 5

TURKEYS 5 4 3

DAIRY 5 3 4

ORANGES 1

HOGS 2

PEANUTS 2

SUGAR CANE 3

TOMATOES 4

SOURC E: U SDA

erate and as South American competitors face lower 

than expected production. 

According to the USDA, average prices for all three 

crops for the current marketing year are expected to fall 

from the average of the previous year, but should remain 

favorable relative to the average price received over the 

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

that mature over the 1996/1997 marketing year recently 

trading approximately 30 percent below their respective 

contract highs reached earlier in the year. 

Provided livestock and milk prices continue their recent 

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

This is especially good news for cattle operators who 

faced falling cattle prices and rising feed costs earlier in 

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

The prospect for timely repayment of production loans 

to the Region’s agriculture banks appears good based on 

the current expectations for operating income. Cash 

flows for many crop producers also should be supported 

by the first of seven fixed-support payments under the 

1996 Farm Bill.

 Allen Puwalski, Banking Analyst

 Steven E. Cunningham, Senior Financial Analyst 

Regional Outlook 19 First Quarter 1997 

PROTOTYPE
 

 

 

 

 

 

 

 

 

 

 

 

Regular Features	 Regional Banking
 

Current Regional Banking Conditions
 

• 	 Bank profitability dips slightly but remains high; however, thrift profits plunge during the third quarter 

due to the one-time SAIF assessment. 

• 	 The special assessment to capitalize the SAIF will cost 387 institutions in the Atlanta Region $650 million. 

• 	 Unprofitable institutions in the Atlanta Region increased from 70 to 121 during the third quarter, largely 

due to the SAIF assessment. 

• 	 Loan growth at commercial banks within the Region exceeds the nation, paced by strong growth in credit 

card loans, residential mortgage loans and construction and development loans. 

Given the generally favorable economic conditions 

throughout the Region, most banks and thrifts in the 

Atlanta Region performed well during the third quarter 

despite the special assessment for the capitalization of 

the SAIF. Chart 1 depicts the quarterly return on assets 

(ROA) and return on equity (ROE) for commercial 

banks and thrifts since the third quarter of 1995. 

Third-quarter Performance 

Banks earned a quarterly ROA of 1.21 percent. This 

return matches nationwide results but is down slightly 

from 1.25 percent a year ago. Strong earnings continue to drive capital ratios higher with the leverage 

ratio at an all-time high of 7.91 percent, or 22 basis 

points above the national average. The quarter’s ROE 

was above 13 percent; banks in this Region have posted 

a double digit ROE since the fourth quarter of 1991. 

The quarterly results are impressive given a significant 

rise in provisioning expense, which almost doubled 

from a year ago. Relative to assets, the quarterly 

provision expense increased from 22 basis points to 43 

basis points. The increased provisioning was needed to 

offset rising net charge-offs, mainly from consumer and 

credit card loans. 

For all banks within the Region, charge-offs have increased from 0.34 percent of loans at year-end 1995 to 

0.45 percent. The increase in credit card charge-offs, 

however, has been much higher, from 3.15 percent to 

3.82 percent. Charge-off rates have differed among 

banks by asset size. Larger banks, those with assets of 

$500 million or more, have a credit card charge-off 

rate of 3.85 percent and overall charge-off rate of 0.49 

percent. In contrast, smaller banks, those with assets of 

$500 million or less, have only written off 2.78 percent 

of their credit card loans and 0.25 percent of total loans. 

The SAIF assessment drove the quarterly ROA for 

thrifts and savings banks to a negative 0.42 percent, 

which is well below the national loss of 0.05 percent. 

Despite the loss, however, the Region’s thrifts did 

manage to set an all-time high for the quarterly netinterest margin of 3.72 percent. Similar to banks, thrifts 

showed a large increase in charge-offs and the provision expense. The quarterly provision expense more 

than tripled from 15 basis points a year ago to 56 basis 

points. On a positive note, lower assessment rates 

provide much improved earnings prospects going forward. Despite the large quarterly loss, the thrift 

leverage ratio only dropped 21 basis points to 8.88 

percent. Thrifts had a quarterly negative ROE of 4.64 

percent, the lowest return since the third quarter of 

1991. 

The SAIF assessment was the driving force in a 90 

CHART 1

-5% 

0% 

5% 

10% 

15% 

20% 

3Q95 4Q95 1Q96 2Q96 3Q96 

-0.5% 

0.0% 

0.5% 

1.0% 

1.5% 

ROE - Banks ROE - Thrifts 

ROA - Banks ROA - Thrifts 

Special Assessment Reduces Thrift Earnings 

Source: FDIC Division of Research and Statistic's Research Information 

System (RIS). 

ROE ROA 

Regional Outlook	 20 First Quarter 1997 

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Regular Features Regional Banking
 

percent increase in quarterly noninterest expense at 

thrifts. However, even without the special assessment, noninterest expense grew 17 percent, which 

exceeds the 10 percent growth rate recorded during 

the first six months of 1996. This suggests that some 

thrifts elected to bundle some other charges with the 

SAIF assessment. A portion of the rise in overhead 

results from an increase in the number of thrift employees. Thrift employees number 20,517, up from 

19,372 a year earlier. This 5.9 percent growth in thrift 

personnel is not markedly higher than the 4.2 percent 

increase at banks; however, thrift assets have shrunk 

by almost 11 percent since last year while bank assets 

have expanded by 9.5 percent. 

Commercial Bank Loan Portfolios Experience 

Strong Growth 

Robust loan growth continued during the quarter with 

total loans at commercial banks 

increasing $53.9 billion or 13.5 

percent from a year ago. Nationwide, loans increased only 7.1 

percent. Within the Region, 

most major loan categories 

have expanded at a double-digit 

growth rate since last year. Credit card loans grew 

by nearly 32 percent, which was by far the highest 

growth rate. The two next highest growth rates were 

for residential (1 to 4 family) real estate loans at 21 

percent and construction and development loans at 19 

percent. 

In conjunction with vigorous loan growth, there has 

been a shift in the distribution of loans from a year 

ago. Real estate loans have remained steady as a 

percentage of total loans, but there has been a shift 

within this category with construction and development and residential lending increasing their share 

of the total. Relative to real estate loans, residential 

loans have increased from 51.5 percent a year ago to 

54 percent and construction and development loans 

have grown from 7.9 percent to 8.2 percent. The 

growth has come mainly at the expense of nonresidential real estate loans, which have declined 

from 29 percent to 26.6 percent. Historically, the 

growth rate of residential real estate lending has been 

closely linked with employment growth (see Chart 2). 

Examiners indicate that most banks within the Region are actively soliciting new loans. Moreover, 

they see a slight increase in the number of banks 

underwriting speculative construction projects and 

�HART �
 

-2 

-1 

0 

1 

2 

3 

4 

87 88 89 90 91 92 93 94 95 96e 

0 

5 

10 

15 

20 

25 

30 

Region's Job Growth Drives Real Estate 

Loan Demand 

(Percent Change from Prior Year) 

Change in 

RE Loans 

Change in 

Employment 

Note: Loan data are for all FDIC-insured institutions. Residential Real Estate (RE) 

includes single and multifamily but excludes home equity lines. 

Sources: Bureau of Labor Statistics and FDIC Division of Research and Statistics 

Nonfarm Employment 

Residential RE 

Total RE 

extending credit to less credit-worthy consumers. 

Impact of Special Assessment 

According to preliminary figures supplied by the 

FDIC’s Division of Finance, 387 institutions within 

the Region will pay about $650 million for the special assessment. A 

breakdown of this total shows that 

commercial banks will pay a greater 

share of the total than thrifts. In the 

Atlanta Region, 143 commercial 

banks in the Region will pay $386 

million, and 244 thrifts and savings banks will pay 

$263 million. 

The average bill for commercial banks is $2.7 million, but drops to $1.8 million if the highest two 

payers are excluded. Among commercial banks, the 

assessment is concentrated as six companies will pay 

about $284 million or 74 percent of the $386 million 

bank total. For thrifts and savings banks, the average 

assessment is much lower and is less concentrated 

among the top two payers. The average bill is $1.08 

million and the two highest will only pay $33.5 million or 12.7 percent of the $263 million thrift total. 

Although thrifts have a smaller average bill, the 

assessment does represent a much larger share of 

their capital — 4.85 percent of thrift equity compared to 0.67 percent of commercial bank equity. 

Unprofitable Institutions on the Rise 

Regional Outlook 21 First Quarter 1997 

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Regular Features Regional Banking
 

Although the SAIF special assessment is a major factor 

for the institutions that are reporting a loss for the first 

nine months of the year, there may be some concern for 

the institutions that experienced a loss larger than their 

SAIF assessment. A total of 23 institutions had a 

pre-tax loss (17 after-tax, assuming a 40 percent 

marginal tax rate) larger than their assessment, which 

is up from just five institutions a year ago. In nearly 

all instances, higher loan loss provisioning, arising from 

sharply higher consumer loan charge-offs, was the leading cause underlying the loss. These institutions may 

need monitoring, as the generally favorable economic 

and banking conditions throughout the Region will not 

persist indefinitely. 

Jack M.W. Phelps, Senior Regional Analyst 

Regional Outlook 22 First Quarter 1997 

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