In Focus This Quarter

Indicators of Industry Performance--The reported financial condition of insured banks and thrifts is strong. However, despite projected growth in earnings, bank and thrift stocks underperformed the broader market through October 1999.

Economic Conditions--The economy remains generally strong, and the outlook calls for continued growth. Growth is likely to slow, however, in order to correct financial imbalances that have developed as a result of a rapid creation of household and commercial credit and borrowing from abroad. There is a threat that the adjustment process could be a volatile one.

Emerging Risks in Banking--Rising indebtedness on the part of businesses and households raises concerns about future loan performance. Industry responses to intense competition have created greater credit, market, and operational risks.

Consumer Lending--Banks and thrifts are becoming increasingly involved in subprime consumer lending, which has raised some supervisory concerns.

Commercial and Industrial Lending--Signs of deterioration in corporate credit quality can be found in rising loss rates, slower profit growth, and rising corporate bond defaults. At the same time, banks are expanding their lending to heavily indebted companies in the syndicated loan market.

Commercial Real Estate and Construction Lending--Loans for real estate construction and development are growing rapidly. Despite an uptick in commercial vacancy rates, loan losses remain low.

Agricultural Lending--Low commodity prices are hurting farm operating incomes, but widespread effects on farm banks have yet to materialize.

Funding and Interest Rate Risk--Lagging deposit growth has led to a greater reliance on more volatile, market-based funding, and some institutions are taking on greater interest rate risk to maintain loan growth.

By the Analysis Branch Staff

Regional Perspectives

Economic and Banking Conditions--The Region's economy continues to underperform that of the nation. Payroll employment growth has slowed sharply with job losses in the manufacturing and energy sectors. The agricultural sector continues to deteriorate as the Region's important rice and cotton crops experience substantial price declines. Banking conditions remain favorable, but weaknesses in net interest margins persist.

New Bank Activity and Performance--Institutions established since the last recession represent almost 11 percent of all insured institutions in the Region. New banks' earning performance has worsened from the middle of this decade, and these newly chartered institutions are taking slightly longer to become profitable than in prior periods. Historically, new banks have reported considerably higher failure rates during periods of economic stress than established banks have.

By the Memphis Region Staff