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PiecesofE

An Economic Perspective on the 8th District

THE
FEDERAL
RESERVE

I5VNK of

ST. LOLLS

Banks on the Rise in 1991
Ag Sector Weakens
R & R i n 1991



THE EIGHTH FEDERAL RESERVE DISTRICT

ILLINOIS

INDIANA

CONTENTS_______________________________________________________________________________________

Banking and Finance
District Bank Performance in 1991: More Ups Than D ow ns..........................................................................1
Agriculture
Agriculture in 1991: The Decline Continues....................................................................................................12
Business
Restructure and Recession: A Year of Transition............................................................................................22
Statistics ........................................................................................................................................................... 28
Pieces of Eight—An Economic Perspective on the 8th District is a quarterly summary' of agricultural, banking and
business conditions in the Eighth Federal Reserve District. Single subscriptions are available free of charge by writing:
Research and Public Information Department, Federal Reserve Bank of St. Louis, Post Office Box 442, St. Louis,
MO 63166-0442. The views expressed are not necessarily official positions of the Federal Reserve System.



1

District Bank Perfor­
mance In 1991: More
Ups Than Downs

A

by Michelle A. Clark
Thomas A. Pollmann provided research assistance.

J L .^^L fter several years of mediocre perfor­
mance, Eighth District commercial banks posted
sizable earnings gains in 1991. Gradually improv­
ing economic conditions, including lower interest
rates and rising loan demand, provided much of
the impetus to increased earnings and improved
asset quality throughout the District. A detailed
analysis of this performance is presented below,
with comparisons drawn between District banks and
their national peers.1 Conventional performance
measures, defined precisely in the shaded insert,
are examined to assess the financial condition and
soundness of the District’s banking industry.2

Earnings
Eighth District banks earned $1.29 billion in
1991, an increase of more than 11 percent from
1990. In 1990, District bank earnings rose just 2.6
percent. U.S. peer banks, meanwhile, recorded a
larger turnaround, with earnings rising 27.2 per­
cent to $14.64 billion after a 23.6 percent decline
in 1990.
Despite the substantial improvement in earn­
ings, slightly more District banks reported losses
in 1991 than in 1990. Seventy-five (or 6.1 percent
of the District’s 1,238 banks) incurred losses in
1991, vs. 73 banks (or 5.8 percent of the District’s
banks) in 1990. In contrast, a smaller proportion
of U.S. peer banks lost money last year than they
had in the previous year; in 1991, 10.7 percent of
U.S. peer banks were in the red compared with
12.7 percent in 1990.
Return on Assets and Equity
When examining bank earnings, two standard
profitability measures are generally used: the
return on average assets (ROA) ratio and the
return on average equity (ROE) ratio. ROA indi­
cates how successfully bank management employed
the bank’s assets to earn income; ROE provides
shareholders with a measure of the institution’s
return on their investment.



ROA and ROE improved moderately at Dis­
trict banks in 1991 after declining the previous two
years. As indicated in table 1, ROA rose 5 basis
points to 0.93 percent while ROE increased 54 basis
points to 11.71 percent. These ratios rose as earn­
ings growth exceeded that of average assets (up
5.6 percent in 1991) and average equity (up 6.3
percent in 1991).3 Much of the improvement in
District average profitability ratios can be attributed
to strong year-over-year earnings increases at the
largest District banks—the 11 banks with assets of
$1 billion to $5 billion and the three banks with
assets of more than $5 billion. These two groups
registered gains of 17 and 20 basis points, respec­
tively, in ROA, and gains of 235 and 322 basis
points, respectively, in ROE from 1990 to 1991.
Profit ratios at U.S. peer banks increased sub­
stantially in 1991, with average ROA rising 14 basis
points to 0.67 percent and ROE rising 163 basis
points to 9.06 percent. Despite this substantial im­
provement, most categories of U.S. peer banks
still rank far below their District counterparts in
these profit measures. All of the improvement in
U.S. peer bank profit ratios can be attributed to
strong earnings growth (the numerator), as average
assets rose a meager 1.2 percent in 1991 while
average equity capital rose 4.3 percent. Asset
growth slowed in 1991 largely because of weak
loan demand. In addition, some banks facing trou­
ble raising capital opted to curtail asset growth to
meet new risk-based capital guidelines.4
Components of Earnings
As with any business, a bank’s financial suc­
cess is determined by how much revenue its activi­
ties generate over and above the costs incurred in
generating that revenue. In assessing the earnings
performance of banks, analysts typically examine
the three major components of income and ex­
pense: net interest income, net noninterest income
and the loan loss provision. These components,
like net income, are usually adjusted by average
assets to facilitate comparison among banks.
Net Interest Margin — The net interest mar­
gin (NIM) is an indicator of how well interest­
earning assets (basically loans and investments) are
being employed relative to interest-bearing liabili­
ties (deposits and other sources of funds). After
declining 12 basis points in 1990, the NIM at Dis­
trict banks rose 1 basis point to 4.19 percent in 1991
(see table 2). Mid-sized District banks (those with
average assets in the $100 million to $300 million
range and the $300 million to $1 billion range)
posted declines of 4 basis points and 21 basis
points, respectively. Substantial increases in the
average NIM at the largest District banks, however,
offset those declines. District banks with assets of
$1 billion to $5 billion posted a 17-basis-point gain
in the average NIM, while those with more than

2

Return on average assets ratio (ROA)—An
indicator of how well management is employing
a bank’s assets to earn income, return on assets
(ROA) is calculated by dividing a bank’s net in­
come by its average annual assets.

Loan and lease loss provision ratio—An in­
dicator of expected loan and lease losses, the
loan and lease loss provision ratio (usually
shortened to loan loss provision ratio) is calcu­
lated by dividing the provision for loan and
lease losses by average assets. The provision
for loan and lease losses is an income statement
account which reduces a bank’s current earnings.

Return on average equity ratio (ROE)—An
indicator to shareholders of a bank’s return on
their investment, return on equity (ROE) is cal­
culated by dividing a bank’s net income by its
average annual equity capital. Equity capital
consists of common and perpetual preferred
stock, surplus, undivided profits and capital
reserves and cumulative foreign currency trans­
lation adjustments.

Nonpetforming loan and lease loss ratio—
An indicator of current and future loan
problems, the nonperforming loan ratio is calcu­
lated by dividing loan and lease financing
receivables that are 90 days or more past due or
in nonaccrual status by total loans. Restructured
loans and leases that fall into the 90 days or
more delinquent status or in nonaccrual status
are included as well.

Ratio Definitions

Net interest margin (ATM)—An indicator of
how well interest-earning assets are being em­
ployed relative to interest-bearing liabilities, the
net interest margin is calculated by dividing the
difference between interest income and interest
expense by average earning assets. Interest in­
come comprises the interest and fees realized
from interest-earning assets, and includes such
items as interest and points on loans, interest
and dividends from securities holdings, and in­
terest from assets held in trading accounts. In­
terest expense includes the interest paid on all
categories of interest-bearing deposits, the ex­
penses incurred in purchasing federal funds and
selling securities under agreements to repur­
chase, and interest paid on capital notes. Aver­
age earning assets rather than average assets are
used in the net interest margin because they are
the only assets from which a return in the form
of interest is generated.
Net noninterest margin (NNIM)—An indi­
cator of a bank’s operating efficiency and its
ability to generate income from noninterest­
earning assets, the net noninterest margin is cal­
culated by subtracting noninterest expense
(overhead) from noninterest income and dividing
by average assets. Noninterest expense is the
sum of the costs incurred in the bank’s day-today operations, which includes employee salaries
and benefits, expenses of premises and fixed
assets, as well as legal and directors’ fees, in­
surance premiums, and advertising and litigation
costs. Noninterest income includes income from
fiduciary (trust) activities; service charges on
deposit accounts; trading gains (losses) from
foreign exchange transactions; gains (losses) and
fees from assets held in trading accounts; and
charges and fees from miscellaneous activities
like safe deposit rentals, bank draft and money
order sales, and mortgage servicing.



Net loan loss ratio—An indicator of actual
loan losses, the net loan loss ratio is calculated
by dividing loan losses (adjusted for recoveries)
by average total loans. Also called the chargeoff rate.
Risk-based capital and leverage ratios—
Two risk-based capital measures have been es­
tablished to control for credit risk across banks.
One ratio comprises Tier 1 capital divided by
risk-adjusted assets and the other comprises to­
tal capital (Tier 1 -(-Tier 2) divided by riskadjusted assets. Tier 1 capital consists of: com­
mon stock and its related surplus, undivided
profits and capital reserves (retained earnings),
noncumulative perpetual preferred stock and its
related surplus, minority interests in consolidat­
ed subsidiaries and mortgage servicing rights
(up to a specified limit, using the FDIC defini­
tion of eligible intangible assets) less net unreal­
ized loss on marketable equity securities. Tier 2
capital consists of allowable subordinated debt
and limited life preferred stock, cumulative
preferred stock, mandatory convertible debt, the
allowable portion of the loan and lease loss al­
lowance and agricultural loss deferral. Riskadjusted assets are computed by attaching
weights of 0, 20, 50 and 100 percent to on- and
off-balance sheet assets and subtracting disal­
lowed intangible assets, reciprocal capital hold­
ings, the excess portion of the allowance for
loan and lease losses and the allocated transfer
risk reserve. In addition to the risk-based ratios,
banks are required to meet a leverage ratio. A
top-rated bank with no plans for expansion is
expected to have a leverage ratio of at least 3
percent; lesser-rated banks and those wishing to
expand must meet a 4 percent minimum. The
leverage ratio is computed by dividing Tier 1
capital by average total consolidated assets
(average assets less ineligible intangible assets
and investments in unconsolidated subsidiaries).

3

Table 1
Return on Average Assets (ROA)
1991
Asset Category
All banks1
Less than $25 million
$25 million - $50 million
$50 million - $100 million
$100 million - $300 million
$300 million - $1 billion
$1 billion - $5 billion
$5 billion - $15 billion

District
0.93%
0.78
0.92
0.93
1.01
0.90
1.00
0.81

1990
U.S.
0.67%
0.62
0.77
0.88
0.84
0.76
0.50
0.61

District
0.88%
0.77
0.90
1.02
0.96
0.97
0.83
0.61

1989
U.S.
0.53%
0.45
0.74
0.81
0.87
0.74
0.47
0.21

District
0.91%
0.82
1.02
1.09
1.04
1.05
0.47
0.82

1988
U.S.
0.71%
0.58
0.76
0.85
0.94
0.82
0.70
0.50

District
0.95%
0.84
0.98
1.05
0.99
1.02
0.85
na

U.S.
0.76%
0.36
0.66
0.78
0.81
0.70
0.78
0.80

Return on Average Equity (ROE)
1991
Asset Category
All banks1
Less than $25 million
$25 million - $50 million
$50 million - $100 million
$100 million - $300 million
$300 million - $1 billion
$1 billion - $5 billion
$5 billion - $15 billion

District
11.71%
7.96
9.99
10.30
12.18
11.10
14.87
12.64

1990
U.S.
9.06%
6.13
8.29
9.94
10.40
9.91
7.13
9.72

District
11.170/o
7.89
9.90
11.28
11.71
12.50
12.52
9.42

1989
U.S.
7.43%
4.39
8.06
9.22
10.76
9.87
6.94
3.64

District
1 1 .550/0

8.37
11.08
12.20
12.78
13.49
7.24
12.97

1988
U.S.
9 .990/0
5.64
8.41
9.76
11.85
11.43
10.48
8.56

District
12.07o/o
8.67
10.94
11.88
12.20
13.06
12.74
na

U.S.
10.91 0/0
3.56
7.45
9.16
10.41
10.19
11.79
14.35

SOURCE: FFIEC Reports of Condition and Income for All Insured Commercial Banks, 1988-91.
11ncludes only those banks with average assets of less than $15 billion. The division of banks into asset categories is
based on annual average assets.
na = not available

in the average NIM, while those with more than
$5 billion in assets recorded an 11-basis-point gain.
U.S. peer banks typically outperform District
banks in this basic measure of profitability, and
1991 was no exception. The gap between the Dis­
trict NIM and that of U.S. peer banks widened to
36 basis points in 1991, as the U.S. peer bank ra­
tio increased 12 basis points to 4.55 percent. The
improvement in NIMs was widespread, with every
asset category of U.S. banks but one (the
$300 million to $1 billion category) posting in­
creases. As with District banks, the largest U.S.
peer banks experienced the largest increases in the
NIM. Despite the increases, however, the majority
of the nation’s (and the District’s) larger banks
still lag their smaller peers in this “ bread and but­
ter” measure of industry profitability.
Interest Income and Expense — Differences
in net interest margins among banks in different
asset categories and geographic areas can be ac­
counted for by the income and expense compo­
nents of the ratio. In 1991, banks generally



experienced increases in NIMs because interest ex­
pense declined more than interest income. In a
period of declining interest rates, banks reduced
the rates paid on deposits and other interestbearing liabilities by more than they reduced the
rates charged on loans.
Interest income as a percent of average earn­
ing assets declined across the board at District
banks in 1991; the average for all banks declined
95 basis points to 9.37 percent, its lowest level
since 1988 (see figure 1). U.S. peer banks’ aver­
age interest income ratio dropped 88 basis points
to 9.77 percent. At both the District and the na­
tional level, banks in the largest asset categories
posted the steepest drops in the ratio. Despite a
sharper decline in interest income from loans,
leases and securities (which comprise about 80
percent of District and U.S. bank earnings before
taxes), U.S. peer banks experienced a smaller
decline in the ratio of interest income to earning
assets because of weak asset growth. District
banks’ interest income from these sources declined

I
Table 2
Net Interest Margin (NIM)
1991
Asset Category
All banks1
Less than $25 million
$25 million - $50 million
$50 million - $100 million
$100 million - $300 million
$300 million - $1 billion
$1 billion - $5 billion
$5 billion - $15 billion

District
4.19%
4.41
4.36
4.31
4.21
4.23
4.31
3.71

1990
U.S.
4.55%
4.66
4.61
4.60
4.66
4.63
4.54
4.42

District
4.18%
4.42
4.35
4.25
4.25
4.44
4.14
3.60

1989
U.S.
4.43%
4.65
4.59
4.58
4.65
4.73
4.33
4.18

District
4.30%
4.52
4.36
4.31
4.41
4.57
4.06
4.02

1988
U.S.
4.52%
4.80
4.73
4.76
4.86
4.76
4.44
4.36

District
4.26%
4.49
4.31
4.30
4.39
4.48
3.87
na

U.S.
4.54%
4.70
4.64
4.66
4.72
4.62
4.49
4.37

SOURCE: FFIEC Reports of Condition and Income for All Insured Commercial Banks, 1988-91.
includes only those banks with average assets of less than $15 billion,
na = not available

2.4 percent vs. the 4.7 percent decline at U.S.
peer banks.
Interest expense as a percent of average earn­
ing assets declined 96 basis points in the District
in 1991 to 5.18 percent, while the ratio for U.S.
peer banks declined 100 basis points to 5.22 per­
cent. As was the case with interest income, declines
in interest expense increased with bank size. Dis­
trict banks in the $1 billion to $5 billion asset
category, for example, experienced a 128-basispoint decline in their average interest expense ratio,
while U.S. banks in the same category recorded a
98-basis-point decline. One explanation for the
sharper declines at larger banks in 1991 was their
declining reliance on purchased funds, such as fed­
eral funds and brokered deposits. In a period of
weak loan demand, which is typical during reces­
sions, banks are more likely to be able to fund
loan demand with core deposits, decreasing their
reliance on more expensive purchased funds.
Net Noninterest Margin — The net nonin­
terest margin (NNIM) is an indicator of a bank’s
operating efficiency and its ability to generate fee
income. Because noninterest expense usually ex­
ceeds noninterest income, the calculation of the
NNIM yields a negative number; it is common
practice, however, to report the net noninterest
margin as a positive number. Smaller NNIMs,
therefore, indicate better bank performance, all
else equal.
In 1991, as in previous years, District banks
recorded substantially lower NNIMs than their
U.S. peers. As shown in table 3, the difference in
margins between the two groups of banks widened
to 26 basis points in 1991. The 1.97 percent
NNIM recorded by District banks was essentially
unchanged from its 1990 level; U.S. peer banks,
however, experienced a substantial increase (or de­



terioration) of 11 basis points in the average
NNIM in 1991, to 2.23 percent. The increases in
NNIMs at District banks were concentrated at the
very smallest (less than $100 million in average
assets) and the very largest banks (greater than
$5 billion in average assets). At U.S. peer banks,
in contrast, the two largest categories of banks ex­
perienced increases of 18 and 12 basis points,
while the very smallest banks experienced declines
or slight increases.
Noninterest Income and Expense — Nonin­
terest income as a percent of average assets rose
10 basis points in both the District and the nation
in 1991. U.S. peer banks, however, maintained
their substantial edge over District banks in their
noninterest income earnings. District banks record­
ed an average noninterest income ratio of 1.12
percent vs. the 1.55 percent ratio recorded by
U.S. peer banks. U.S. banks surpassed District
banks in every asset category, with the largest
differences occurring in the smallest asset
categories. The largest District banks were able to
narrow the gap somewhat in 1991. District banks
with assets of $1 billion to $5 billion, for example,
increased their average noninterest income ratio by
19 basis points, to 1.64 percent, while District
banks with assets of more than $5 billion increased
their ratio by 38 basis points to 1.98 percent. The
comparable ratios for U.S. peer banks were 1.74
percent and 2.12 percent, respectively.
Noninterest expense (overhead) as a percent of
average assets also rose at District and U.S. peer
banks in 1991. The noninterest expense ratio in­
creased 11 basis points to 3.09 percent at District
banks in 1991, and 20 basis points to 3.77 percent
at U.S. peer banks. Like the noninterest income
ratio, the largest increases in the noninterest ex­
pense ratio occurred at the largest District and

5

Figure 1

Interest Income and Interest Expense as a Percent o f Average Assets
Percent

Percent

12 F-----

1988

1989

1990

1991

Interest Income
Average Earning Assets

U.S. banks. As in previous years, the lowest
noninterest expense ratios at both District and na­
tional levels were recorded by mid-sized banks
(those with average assets of $50 million to
$300 million). These results are consistent with
most bank cost studies, which show that mid-sized
banks typically have a cost advantage over their
smaller and larger peers.5
District banks continued to record substantially
lower noninterest expense ratios than their U.S.
peers. This result can be largely attributed to low­
er salary expense, which makes up about half of
all noninterest expense. The average salary of a
District bank employee was about $27,400 in 1991
compared with about $31,200 for an employee at a
U.S. peer bank.
Loan and Lease Loss Provision — District
banks set aside $683 million from 1991 pre-tax
earnings (called a loan loss provision) to replenish
and bolster the fund used to absorb loan and lease
losses (called the loan and lease loss allowance or
reserve). The District’s 1991 loan and lease loss
provision (hereafter provision) was 3.2 percent
more than the $662 million provision taken in
1990. U.S. peer banks, in contrast, reduced the
size of their provision in 1991 by 7.1 percent to
$20.36 billion. U.S. peer banks were able to make
a smaller contribution to their loan loss allowance



IZZI

Interest Expense
Average Earning Assets

Net Interest Margin

because of reductions in delinquent loans (dis­
cussed in the next section).
Despite the increase in the level of the provi­
sion at District banks, the provision as a percent of
average assets declined 1 basis point in 1991,
returning to its 1989 value of 0.49 percent (see
table 4). The District’s average ratio declined
primarily because of reductions in provision ratios
at the District’s largest banks. The average ratio at
U.S. peer banks declined 9 basis points in 1991 to
0.93 percent. The difference between the District
and national averages is due primarily to the much
greater loan problems at large U.S. banks com­
pared with Distript banks. The loan loss provision
ratio at U.S. banks with average assets of $1 bil­
lion to $5 billion, for example, was 67 basis points
higher than the District’s ratio of 0.53 percent in
1991. Nevertheless, it is clear that loan problems
at large U.S. peer banks have decreased from their
1990 levels.

Asset Quality
Improved performance at District and U.S.
peer banks in 1991 can be largely attributed to

6

Table 3
Net Noninterest Margin (NNIM)
1991
Asset Cateqory

District

All banks1
Less than $25 million
$25 million - $50 million
$50 million - $100 million
$100 million - $300 million
$300 million - $1 billion
$1 billion - $5 billion
$5 billion - $15 billion

1.97%
2.66
2.30
2.16
1.99
2.03
1.84
1.44

1990
U.S.
2.23%
2.94
2.67
2.48
2.47
2.33
2.11
1.95

District
1.96%
2.63
2.26
2.06
2.01
2.08
1.87
1.38

1989
U.S.
2.12%
3.03
2.62
2.45
2.37
2.30
1.93
1.83

District
2.00%
2.60
2.19
2.04
2.05
2.11
1.98
1.47

1988
U.S.
2.11%
2.85
2.60
2.48
2.43
2.28
2.01
1.72

District
2.05%
2.59
2.19
2.10
2.11
2.15
1.73
na

U.S.
2.20%
2.95
2.61
2.48
2.47
2.36
2.05
1.83

SOURCE: FFIEC Reports of Condition and Income for All Insured Commercial Banks, 1988-91.
includes only those banks with average assets of less than $15 billion,
na = not available

declines in delinquent loans and other assets. Real
estate loan problems, which have plagued the na­
tion’s bankers for the past several years, have
abated somewhat. Troubled consumer and business
loans, which rose in 1990 with the onset of the
recession, also declined throughout 1991 in both
the District and the nation. Despite the improve­
ment, the industry continues to face difficulties
stemming from a national economy that is far from
robust and weak real estate markets in many parts
of the country.
Asset quality may be gauged by examining the
nonperforming loan ratio and the net loan loss ra­
tio. The nonperforming loan ratio indicates the
current level of problem loans as well as the
potential for future loan losses. The net loan loss
ratio specifies the percentage of loans actually
written off the bank’s book for a given period.
Nonperforming Loans and Leases
Total nonperforming loans and leases at Dis­
trict banks declined 6.7 percent from year-end
1990 to year-end 1991, to $1.34 billion. As shown
in table 5, the average nonperforming loan ratio at
District banks dropped 13 basis points in 1991 to
1.68 percent. Most categories of District banks ex­
perienced declines in their nonperforming loan ratio,
with the two categories of the largest District
banks showing the most improvement, 15 and 74
basis points, respectively. Two groups of banks,
however, posted significant increases in the nonperforming loan ratio: those banks with less than
$25 million in assets (up 38 basis points) and those
banks with assets of $300 million to $1 billion (up
18 basis points).
U.S. peer banks recorded a slightly larger
decline in the nonperforming loan ratio than did



District banks, because of a sharper drop in the
level of nonperforming loans (7.6 percent) in
1991. The U.S. peer bank average fell 15 basis
points to 2.90 percent. As with District banks, most
categories of U.S. peer banks posted declines in the
nonperforming loan ratio, and the largest peer banks
(those with assets of $5 billion to $15 billion) also
recorded the biggest decline (62 basis points) in
the ratio. Still, the nonperforming loan ratios of
most categories of U.S. banks remain substantially
above the “ problem” or benchmark level of 2 per­
cent. In contrast, most categories of District banks
have, for the past four years, maintained nonper­
forming loan ratios comfortably below the industry
benchmark.
All major categories of District bank loans—
agricultural, consumer, real estate and businessshowed improvement in nonperforming ratios at
District banks in 1991. For the nation, this was
also true of every category but consumer loans.
Real estate loan problems, which have received
much attention from analysts, the media and regu­
lators during the past several years, have
diminished, as illustrated by the drop in the ratio
of nonperforming real estate loans to all real estate
loans. That ratio declined from 2 percent to 1.86
percent at District banks in 1991, and from 3.81
percent to 3.51 percent at U.S. peer banks in
1991. Still, nonperforming real estate loans ac­
counted for 56.4 percent of District nonperforming
loans and 55.4 percent of U.S. peer bank nonper­
forming loans at year-end 1991.
The bulk of problem real estate loans remain
in commercial real estate portfolios. Figure 2
shows the nonperforming loan ratios for six types
of real estate loans at both District and U.S. peer
banks as of the end of 1991. Although most of
these ratios declined throughout the year, some are

I
Table 4
Provision for Loan Losses as a Percent of Average Assets

Asset Category
All banks1
Less than $25 million
$25 million - $50 million
$50 million - $100 million
$100 million - $300 million
$300 million - $1 billion
$1 billion - $5 billion
$5 billion - $15 billion

District
0.49%
0.30
0.38
0.42
0.42
0.53
0.53
0.73

1989

1990

1991
U.S.
0.93%
0.34
0.40
0.43
0.55
0.73
1.20
1.27

District
0.50%
0.28
0.36
0.33
0.44
0.48
0.57
0.91

U.S.
1.02%
0.41
0.42
0.46
0.53
0.80
1.24
1.49

District
0.49%
0.32
0.28
0.29
0.41
0.44
0.77
0.76

1988
U.S.
0.84%
0.50
0.48
0.47
0.48
0.67
0.80
1.34

District
0.39%
0.31
0.33
0.31
0.40
0.37
0.47
na

U.S.
0.64%
0.62
0.55
0.52
0.50
0.60
0.69
0.74

SOURCE: FFIEC Reports of Condition and Income for All Insured Commercial Banks, 1988-91.
’ Includes only those banks with average assets of less than $15 billion,
na = not available

Table 5
Nonperforming Loans as a Percent of Total Loans
1991
Asset Category
All banks1
Less than $25 million
$25 million - $50 million
$50 million - $100 million
$100 million - $300 million
$300 million - $1 billion
$1 billion - $5 billion
$5 billion - $15 billion

District
1.68%
1.95
1.56
1.54
1.71
1.78
1.48
1.96

U.S.
2.90%
1.77
1.86
1.96
2.12
2.46
3.22
3.63

District
1.81%
1.57
1.60
1.57
1.82
1.60
1.63
2.70

1988

1989

1990
U.S.
3.05%
1.96
1.96
2.02
2.01
2.51
3.11
4.25

District
1.60%
1.62
1.67
1.50
1.64
1.45
1.56
1.75

U.S.
2.39%
2.12
2.31
2.00
1.92
2.31
2.15
2.98

District
1.62%
1.71
1.68
1.67
1.70
1.28
1.68
na

U.S.
2.14%
2.55
2.50
2.15
2.38
1.99
1.96
2.18

SOURCE: FFIEC Reports of Condition and Income for All Insured Commercial Banks, 1988-91.
’ Includes only those banks with average assets of less than $15 billion,
na = not available

stubbornly high, such as the ratio of nonperform­
ing construction and land development (CLD)
loans to all CLD loans. The two other types of
commercial real estate loans—multifamily mort­
gages and nonfarm nonresidential mortgages—also
have very high delinquency rates, in both the Dis­
trict and the nation. Banks carrying large portions
of these nonperforming loans will no doubt take a
hit to earnings for several more years, as real es­
tate markets slowly move back toward equilibrium
Net Loan and Lease Losses
A more direct measure of loan problems than
the nonperforming loan ratio is the percentage of



loans and leases actually written off a bank’s
books. The ratio of net loan and lease losses to to­
tal loans (also called the charge-off rate) is an indi­
cator of problem lending in the current year as
well as prior years, because of bank management’s
partial discretion in determining when a loan is
deemed uncollectible and is thus written off.6
As indicated in table 6, District banks wrote
off an average of 74 cents for every $100 of loans
on the books in 1991, up 3 cents from the chargeoff rate of 1990. In contrast, U.S. peer banks
charged off $1.33 for every $100 in loans out­
standing in 1991, up 15 cents from the 1990
charge-off rate of $1.18. Net loan and lease losses
totaled $584.9 million at District banks in 1991, an

8

Figure 2

Nonperforming Real Estate Loan Ratios by Type, District and
U.S. Peer Banks /I s of Year-End 1991
Percent

increase of 7.4 percent from the 1990 level. U.S.
peer banks wrote off a total of $17.6 billion in un­
collectible loans in 1991, up 11 percent from 1990.
All District bank asset categories but one
registered increases in the charge-off rate in 1991.
The same scenario held true for U.S. peer bank
asset categories. As in previous years, District
banks recorded lower net loan loss ratios than their
U.S. peers, with the differences becoming larger
as bank size increased. Business loans comprised
about 42 percent of all charge-offs at District
banks, while consumer loans accounted for 27 per­
cent and real estate loans another 30 percent. U.S.
peer banks had a smaller concentration of commer­
cial loan losses (36 percent of net loan losses), and
a higher concentration of consumer loan losses
(34 percent of the total). Real estate loans com­
prised about 28 percent of net loan losses at U.S.
peer banks.

Capital Adequacy
Banks maintain capital to absorb losses, pro­
vide for asset expansion, protect uninsured deposi­
tors and promote public confidence in their



financial soundness. Since 1985, banks have been
required by regulators to meet minimum capital
standards.7 In concert with regulators in 11 other
industrial countries, U.S. bank regulators in 1988
adopted new capital guidelines that would not only
standardize capital measures across countries, but
would also account for differences in credit risk
across banks. These new requirements will be fully
phased in by December 31, 1992; transitional re­
quirements went into effect at year-end 1990.
The requirements consist of a leverage ratio
(core or Tier 1 capital to average total consolidated
assets) and two risk-based capital ratios (Tier 1
capital to risk-adjusted assets and total capital to
risk-adjusted assets); the year-end 1992 minimums
for these ratios are 3 percent, 4 percent and 8 per­
cent, respectively.8 U.S. bank supervisors have in­
dicated they expect banks to exceed these minimums
by a substantial margin. The extent to which banks
surpass capital ratio minimums is expected to in­
fluence regulatory decisions about mergers, acqui­
sitions and new banking powers. The vast majority
of District and U.S. banks already meet the fully
phased in capital requirements.
As illustrated in table 7, the average ratios
recorded by District and U.S. peer banks in 1991
far exceeded the regulatory minimums. District

g

Table 6
Net Loan Losses as a Percent of Total Loans
1991
Asset Category
All banks1
Less than $25 million
$25 million - $50 million
$50 million - $100 million
$100 million - $300 million
$300 million - $1 billion
$1 billion - $5 billion
$5 billion - $15 billion

District
0.74%
0.52
0.57
0.60
0.67
0.68
0.76
1.19

1990
U.S.
1.33%
0.58
0.65
0.67
0.81
1.01
1.56
1.80

District

1989
U.S.

0.71 %
0.44
0.51
0.50
0.64
0.64
0.86
1.11

District

1.18%
0.67
0.64
0.66
0.71
0.95
1.22
1.71

0.71%
0.48
0.47
0.45
0.57
0.55
0.87
1.35

1988
District

U.S.
0.97%
0.82
0.78
0.68
0.66
0.86
0.91
1.31

0 .760/o
0.60
0.54
0.48
0.55
0.45
1.22
na

U.S.
0.96%
1.09
0.89
0.78
0.70
0.77
0.97
1.23

SOURCE: FFIEC Reports of Condition and Income for All Insured Commercial Banks, 1988-91.
includes only those banks with average assets of less than $15 billion,
na = not available

Table 7
Year-End 1991 Regulatory Capital Ratios
Average Tier 1
Capital Ratio
Asset Category
All banks1
Less than $25 million
$25 million - $50 million
$50 million - $100 million
$100 million - $300 million
$300 million - $1 billion
$1 billion - $5 billion
$5 billion - $15 billion

District
12.35%
14.35
12.29
12.15
10.71
9.56
9.66
8.66

U.S.
12.60%
15.92
12.33
11.75
10.48
9.60
10.17
8.23

Average Total
Capital Ratio
District
13.36%
15.32
13.31
13.15
11.69
10.67
10.90
10.57

U.S.
13.77%
17.09
13.46
12.83
11.62
10.97
12.00
10.25

Average
Leverage Ratio
District
9.52%
10.55
9.31
9.02
9.49
9.44
6.76
6.32

U.S.
9.50%
11.80
9.27
8.86
8.21
7.70
6.88
6.30

SOURCE: FFIEC Reports of Condition and Income for All Insured Commercial Banks, 1991.
includes only those banks with average assets of less than $15 billion.

banks’ year-end 1991 Tier 1 capital ratio of 12.35
percent was 835 basis points above the minimum;
U.S. peer banks’ ratio of 12.60 percent was 860
basis points above the minimum. Average total
capital ratios of 13.36 percent for District banks
and 13.77 percent for U.S. peer banks, and aver­
age leverage ratios of 9.52 percent and 9.50 per­
cent, respectively, also far exceeded the required
levels. In most cases, average ratios were highest
for banks in the smallest asset-size categories. This
is not surprising given the generally less-risky (as
defined by regulators) assets carried by small
banks as well as a tendency for them to have high
equity capital relative to assets. Less than 1 per­
cent of all District banks failed to meet one or
more of the minimum capital ratios. U.S. peer



banks had a slightly higher proportion of capitaldeficient banks, with 1 percent to 2.4 percent fail­
ing to meet one or more of the requirements.

Conclusion
After a lackluster performance in 1989 and
1990, District banks posted improvements in earn­
ings and asset quality in 1991. ROA and ROE
were up moderately at District banks last year,
with the most improvement recorded by the Dis­
trict’s largest banks. U.S. peer bank earnings and
earnings ratios rose sharply in 1991 after poor per-

10

formances in 1990. While delinquent asset levels
are still far above desired levels in many parts of
the country, it appears as if those conditions are
improving, especially in real estate.
Improvements in ROA and ROE in both the
District and the nation in 1991 can be attributed to
increases in net interest margins (NIMs) and
decreases in loan loss provision ratios. Declines in
market interest rates led to larger declines in the
rates paid on deposits and other interest-bearing
liabilities than on the rates received on loans and
other investments. The result was a slight improve­
ment in District NIMs and substantial improvement
in U.S. peer NIMs. After a significant increase in
1990, District banks set aside a smaller portion of
before-tax earnings to cover nonperforming loans
and other assets. The loan loss provision at U.S.
peer banks, meanwhile, actually declined in 1991
after a large increase in 1990.
Asset quality, as measured by the nonperform­
ing loan ratio and the net loan loss ratio, also im­
proved significantly in 1991. The largest District
and U.S. peer banks experienced the largest

declines (that is, improvement) in these ratios.
Much of the deterioration in asset quality over the
last several years was due to declining economic
performance; loan delinquency problems always
rise when the economy turns down. Therefore, in­
creased economic growth should bring delinquency
rates down even further. The other major drag on
asset quality, and hence earnings, over the last
several years has been overbuilt commercial real
estate markets. While some improvement has oc­
curred, it will be many years before vacancy rates
and rents return to profitable levels.
Improved earnings and asset quality also led to
improvements in capital ratios at many District and
U.S. banks. While some banks shrunk their
balance sheets to meet the risk-based capital and
leverage requirements, others were able to raise
capital in equity markets. Despite slightly smaller
average ratios than their U.S. peers, a smaller
proportion (less than 1 percent) of District banks
failed to meet the year-end 1992 capital guidelines
than did U.S. banks overall.

1U.S. peer banks are defined as banks with average an­
nual assets of less than $15 billion.

6Bank management will adjust the loan and lease loss
provision in the current year to reflect nonperforming
loans and leases; those loans may be carried on a
bank’s books, however, for years before a decision is
made to write them off. Net loan and lease losses do
not affect current earnings as does the loan loss provi­
sion; rather, they just alter the allowance for loan losses
(or loan loss reserve), a contra account on the asset
side of a bank’s balance sheet.

2Selected performance measures for banks in Eighth Dis­
trict states are presented in the appendix that follows
the conclusion.
3Much of the increase in District average assets in 1991
can be attributed to the acquisition of thrifts—solvent
and insolvent—by District banks.
4See Michelle A. Clark, “ District Banks Navigate Reces­
sion’s Waters,” Federal Reserve Bank of St. Louis
Pieces of Eight, (December 1991), p. 12, for a discus­
sion of factors affecting asset growth.
5See Jeffrey A. Clark, “ Economies of Scale and Scope
at Depository Financial Institutions: A Review of the
Literature,” Federal Reserve Bank of Kansas City Eco­
nomic Review, (September/October 1988), pp. 16-33, for
a discussion of bank cost issues.




7See Michelle A. Clark, “ Eighth District Banks in 1989:
In the Eye of a Storm?” Federal Reserve Bank of St.
Louis Review, (May/June 1990), p. 15, for a description

of the capital requirements that were in effect from 1985
through 1990.
8Actuatly, the required leverage ratio depends on a
bank’s regulatory rating and its plans for expansion.
See the shaded insert for details.

11

Appendix Table 1
Earnings Analysis: United States and Eighth District States, 1988-91
United
S tates1
Return on Assets
1991
1990
1989
1988
Return on Equity
1991
1990
1989
1988

0.67%
0.53
0.71
0.76

AR
1.15%
1.05
1.04
0.97

IL
0.69%
0.69
0.89
1.01

IN

KY

MS

MO

TN

0.83%
0.80
1.02
1.06

0.88%
0.80
1.04
1.01

0.92%
0.76
0.79
0.85

0.75%
0.84
0.93
0.91

0.78%
0.42
0.61
0.84

9.06
7.43
9.99
10.91

13.60
12.14
12.10
11.47

9.86
10.68
13.94
16.64

10.51
10.37
13.34
13.98

10.77
9.98
12.98
12.57

11.77
9.72
9.94
10.82

9.95
11.05
2.21
11.96

10.53
5.74
8.17
11.43

Net Interest Margin
1991
1990
1989
1988

4.55
4.43
4.52
4.54

4.40
4.42
4.52
4.57

3.68
3.56
3.65
3.66

4.52
4.29
4.31
4.32

4.23
4.15
4.22
4.24

4.48
4.26
4.30
4.44

3.97
4.03
4.38
4.30

4.52
4.46
4.43
4.67

Net Noninterest Margin
1991
1990
1989
1988

2.23
2.12
2.11
2.20

2.08
2.15
2.20
2.24

1.68
1.60
1.51
1.57

2.11
1.95
1.99
2.00

1.98
1.89
1.82
1.92

2.26
2.16
2.19
2.23

1.86
1.87
1.95
2.02

2.24
2.13
2.16
2.17

Loan Loss Provision Ratio
1991
1990
1989
1988

0.93
1.02
0.84
0.64

0.26
0.28
0.35
0.41

0.55
0.43
0.36
0.27

0.69
0.63
0.38
0.36

0.66
0.71
0.48
0.45

0.44
0.54
0.46
0.41

0.57
0.51
0.55
0.49

0.71
1.16
0.85
0.66

1Because all banks in the Eighth District had average assets of less than $15 billion from 1988 to 1991, this category includes
only those banks in the United States with average assets of less than $15 billion to allow for a meaningful comparison.
NOTE: State data are for the whole state, not just the portion located within the Eighth District.
SOURCE: FFIEC Reports of Condition and Income for All Insured Commercial Banks, 1988-91.

Appendix Table 2
Asset Quality Analysis: United States and Eighth District States, 1988-91
United
States1
Nonperforming Loans2
1991
1990
1989
1988
Net Loan Losses2
1991
1990
1989
1988

AR

IL

IN

KY

MS

MO

TN

2.90%
3.05
2.39
2.14

1.67%
1.81
1.90
2.10

2.65%
2.45
2.17
2.40

1.89%
1.80
1.41
1.19

1.74%
2.06
1.72
1.53

1.61%
1.72
1.43
1.47

2.07%
1.74
1.57
1.67

1.98%
2.30
1.82
1.41

1.33
1.18
0.97
0.96

0.44
0.49
0.59
0.77

0.98
1.08
1.39
0.85

0.88
0.71
0.63
0.58

0.88
1.03
0.68
0.64

0.73
0.74
0.74
0.68

0.80
0.67
0.75
0.95

1.24
1.41
1.06
0.98

includes only U.S. banks with average assets of less than $15 billion.
2As a percent of total loans.
NOTE: State data are for the whole state, not just the portion located within the Eighth District.
SOURCE: FFIEC Reports of Condition and Income for All Insured Commercial Banks, 1988-91.






12

Agriculture In 1991:
The Decline
Continues
by Kevin L. Kliesen

declined in every other state. Again, this was con­
sistent with the national numbers as real NCI in
1990 was down from 1989. For 1991, District
NCI and NFI will probably track the national aver­
age. Reinforcing this prediction is the fact that the
total nominal value of production for the major
Eighth District commodities listed in table 3
declined by 3.3 percent in 1991.

Kevin B. Howard provided research assistance.

Why Did Farm Income Fall?

F

or the second consecutive year, farm in­
come in inflation-adjusted (real) terms fell in
1991.1 Declines in crop and livestock receipts and
a reduction in government support payments more
than offset a slight decline in total farm expenses.
Farm income is forecast to decline again this year,
although the decline should not be as marked.
This article examines the preceding develop­
ments, as well as others—some of which are
positive—for the nation and for the Eighth Federal
Reserve District in 1991. Forecasts for 1992 and
developments thus far are provided as well.

Measures o f Farm Sector
Performance in 1991
Lower Farm Income
Table 1 lists the two primary measures of real
farm income. Net farm income (NFI), which is the
most widely watched measure of farm income,
declined 20.2 percent in 1991 to $35.9 billion.
This was the largest one-year percentage drop
since the drought year of 1983, when real NFI fell
43 percent. Another measure of farm income per­
formance is net cash income (NCI).2 Although
NCI—like NFI—declined in 1991, it declined by
much less in percentage terms, falling by 11 per­
cent. Both measures, though, were below their
1985-90 average.
Generally speaking, real farm income at the
District level closely parallels the national trend.
Individual District states, however, may differ sub­
stantially from the national figure when the focus
is restricted to the change for a specific year. This
is shown in table 2, which details farm income
statistics for the District states. Although state
farm income statistics are available with a one-year
lag, table 2 indicates that real NFI in 1990 declined
in each of the District states, just as it did at the
national level. Inflation-adjusted NCI, on the other
hand, rose substantially in Illinois and Indiana, but

The value of agricultural production in any
given year is largely derived from the sale of
crops and livestock. As shown in table 1, both
livestock and crop receipts declined in 1991 at the
national level. Crop receipts, measured at $69.2
billion, declined 2.8 percent in 1991. Livestock
receipts, on the other hand, registered a sharper
decline. After reaching a six-year high of $79.4
billion in 1990, livestock receipts fell 7.4 percent
in 1991 to $73.5 billion; both measures also fell
short of their 1985-90 average.
Figure 1 provides one piece of evidence as to
why crop and livestock receipts fell last year. Crop
prices rose substantially in the first half of 1991
largely because of the California freeze in Decem­
ber 1990 that temporarily inflated many fruit and
vegetable prices. As fruit and vegetable prices
declined to previous levels, the overall crop prices
index fell as well. In fact, as of December 1991,
crop prices were about 1 percent lower than a year
earlier, as the average price for 1991 was lower
than 1990’s average for the major crops of corn,
soybeans, cotton and wheat; the average price of
rice in 1991 was up over 1990.
Figure 1 also shows that although livestock
prices had trended upward from early 1986 to
mid-1990, they have since subsequently weakened.
In fact, despite an increase in early 1991, livestock
prices fell 6.1 percent between December 1990
and December 1991; as will be discussed below,
the livestock prices index fell because of lower
prices received by beef, pork and poultry
producers.
Decline in Farm Expenses
Ameliorating the effects of the decline in farm
receipts last year was a 2.3 percent decline in total
farm expenses (table 1). Lower energy costs and
declines in interest rates, key components of farm
expenses, were the primary reasons for this de­
velopment. Crude oil prices, the major determinant
of energy prices, declined 36 percent from fourthquarter 1990 to fourth-quarter 1991, while the
average interest rate on all non-real estate farm
loans fell from 11.8 percent to 9.8 percent during
the same period. If interest rates and energy prices
remain near their 1991 year-end levels for much of

13

Table 1
U.S. Farm Sector Income Statement
(Billions of 1987 dollars)
Category
Total Farm Receipts1
Crops
Livestock
Government Payments
Gross Farm Income
Gross Cash Income
Total Expenses
Cash Expenses
Net Cash Income*2
Net Farm Income3

1989

1990

1991 P

$155.7
70.8
77.6
10.1
175.6
166.0
129.3
111.3
54.8
46.2

$155.7
71.2
79.4
8.2
172.8
164.7
127.8
110.0
54.7
45.0

$148.7
69.2
73.5
6.8
160.7
155.6
124.8
106.8
48.7
35.9

1992 F
$136
68
68
6
155
148
122
104
41
31

1985-90 Avg.

to $142
to
71
to
73
to
8
to 162
to 155
to 128
to 110
to
46
to
36

$152.5
70.2
76.2
11.6
169.5
164.4
130.7
111.2
53.2
38.8

P = Preliminary F = Forecast
SOURCE: United States Department of Agriculture, Agricultural Outlook (May 1992), Table 29. Nominal numbers in original table
were deflated by the Gross Domestic Product implicit price deflator, 1987 = 100.
includes farm-related income such as machinery hire or custom work. Farm-related income is usually less than 5 percent of
total farm receipts and relatively invariant over time.
2Gross cash income less cash expenses.
3Gross farm income less total expenses; includes value of inventory changes.
NOTE: Totals may not add due to rounding.

Table 2
Eighth Federal Reserve District Farm Income
Statistics (Billions of 1987 dollars)
Net Farm
Income

Net Cash
Income

State

1990

1989

1990

1989

Arkansas
Illinois
Indiana
Kentucky
Mississippi
Missouri
Tennessee

$1.07
1.51
0.93
0.92
0.55
0.77
0.41

$1.15
1.86
1.17
1.05
0.60
0.99
0.51

$1.28
2.19
1.39
1.28
0.72
1.12
0.70

$1.38
1.85
1.14
1.33
0.76
1.22
0.75

SOURCE: Economic Indicators of the Farm Sector: State
Financial Summary, 1990, United States
Department of Agriculture (December 1991).

1992, farm expenses will probably hold steady or
even decline moderately. If rising interest rates and
increased oil demand accompany a resumption in
economic growth, which is a more plausible
scenario, then 1992 farm expenses will probably
rise. A further boost to farm expenses will likely
occur from increased expenditures associated with
the expected 4 percent increase in corn acreage
this year.



Lower Government Support Payments
Another important component of farm income
is the level of federal government support. In
1987, government payments in real terms totaled
$16.7 billion, 42 percent of NFI and 30 percent of
NCI. Subsequently, the level of government sup­
port payments to farmers has declined by more
than one-half, falling to an estimated $6.8 billion
in 1991—or 19 percent of NFI and 14 percent of
NCI (table 1). While the United States Department
of Agriculture (USDA) has forecasted the possibili­
ty of a slight rise in government support payments
for 1992, barring drastic declines in market prices
or severe weather problems, levels of government
support in real terms will probably continue to
hold to their downward trend.
What’s in Store for This Year?
The next-to-last column of table 1 lists USDA
forecasts for 1992. Both real NFI and NCI are
forecasted to decline in 1992, the third year in a
row. Livestock prices are expected to remain rela­
tively weak in 1992 because of expanded produc­
tion and existing large meat supplies (discussed
below). Although 1992 crop receipts are projected
to remain approximately equal to 1991, the rela­
tively small levels of grain stocks for many com­
modities may translate into sharp price increases if

14

Table 3
Eighth Federal Reserve District and United States Crop and Livestock Production in 1991 as a Percent of 1990
State

Corn

Arkansas
Illinois
Indiana
Kentucky
Mississippi
Missouri
Tennessee

115%
89
73
93
100
104
100

122
135
141

86
125
—

94

113

99

United States

Cotton
143%

Rice
111%

—

—

—

—

—

—

Soybeans

Wheat

Beef

Pork

Poultry1

99%
96
101
94
117
109
93

42%
50
57
54
29
63
44

119%
98
100
107
99
97
98

104%
109
105
95
84
104
97

105%
67
104
857
116
128
109

103

72

101

104

105

SOURCE: Agricultural statistics office of each individual state and the United States Department of Agriculture.
1Defined as the production of broilers and turkeys and the pounds sold of mature chickens. (Note: Some District states
may not produce all three categories of poultry.) Broiler production is measured from December 1 to November 30 of
1990 and 1991, respectively.

weather volatility or sudden export demand arises.
Farm expenses in 1992 are forecast to be roughly
equal to those in 1991; however, if the aggregate
economy grows at a stronger pace than many ex­
pect, rising interest rates and farm input prices (for
example, wage rates or energy costs) may increase
more than expected as well. Since state income
and expense measures tend to mirror the national
trends, it is reasonable to anticipate that, if the
USDA’s national forecasts are reasonably accurate,
similar changes will occur at the District level.

spring growing conditions in many areas gave way
to unusual dryness in mid-summer; this was fol­
lowed by an early freeze in the fall in parts of the
upper Midwest. When all was said and done, 1991
corn production was down nearly 6 percent from a
year earlier, as a 10-bushel-per-acre yield reduc­
tion more than offset a 2.7 percent increase in har­
vested acreage.
Table 3 lists 1991 crop and livestock production
relative to 1990 for District states and for the United
States. Corn production declined the most in the tra­
ditional Corn Belt states of Illinois and Indiana, and
was down somewhat less in Kentucky. On the other

Major Eighth District Farm Com­
modities: 1991 Performance,
1992 Outlook
The interaction of market demand and market
supply generally determines the price the farmer
receives.3 Market supply includes the current
year’s production, unused production from the
previous year(s) and, if any, the quantity of im­
ports. Similarly, market demand is a broad meas­
ure that includes human and animal consumption,
exports and industrial uses. The following section
discusses some of these considerations for those
crop and livestock commodities that are most im­
portant in the Eighth District.4
Com
Weather, as usual, had a significant influence
on last year’s corn production. The nearly ideal



hand, Mississippi and Tennessee corn production
was unchanged from last year, while Arkansas and
Missouri posted year-over-year increases.
Table 4 lists the primary components of the
supply and demand of important Eighth District
farm commodities, including corn. Although begin­
ning corn stocks rose 13 percent in the marketing
year 1991-92, the combination of a 6 percent
decline in production and a 5 percent increase in
domestic use are expected to push ending stocks in
1991-92 to their lowest level since the drought
year of 1983, notwithstanding the expected 10 per­
cent drop in exports. As a result, the USDA esti­
mates that corn prices could rise as much as 14
percent over last (marketing) year’s average of
$2.28 to $2.60 a bushel. Preliminary estimates
released by the USDA, however, point to a 4 per­
cent increase in corn plantings this year, which
may have a depressing effect on corn prices.
Cotton
Cotton production in 1991 totaled 17.6 million
bales—the second-largest crop on record and

15

Figure 1

United States Crop and Livestock Prices

1985

1986

1987

1988

14 percent above 1990. Cotton is an important
District cash crop—worth an estimated $1.4 billion
in 1991, up 19.7 percent from the previous year.
Last year’s crop was substantially larger than in
1990 in all four District cotton-producing states
(table 3) and would have been even larger if Mis­
sissippi, the nation’s third-largest producer, had
not suffered from a deluge of spring rains that se­
verely hampered planting and emergence.
The 1991-92 cotton marketing year (August to
July) began with a relatively small 2.3 million
bales in beginning stocks, down 22 percent from
the previous marketing year (table 4). This positive
development was mitigated, however, by last
year’s large crop. On the demand side, domestic
cotton mill use is expected to total 9.3 million
bales, nearly 9 percent above last year and the
highest usage in 25 years. Nevertheless, a 13 per­
cent drop in exports is expected to push ending
stocks to their largest level since 1988-89. Accord­
ingly, cotton prices are forecast to decline about
five cents in the 1991-92 marketing year to near
63 cents a pound.
Rice
Aggregate U.S. rice production is heavily in­
fluenced by Arkansas, Mississippi and, to a lesser
extent, Missouri. Arkansas is the nation’s largest



1989

1990

1991

1992

rice producer, while Mississippi and Missouri are
its fifth- and sixth-largest producers, respectively;
together, these three states account for a little
more than one-half of all U.S. rice production.
Last year, Arkansas and Missouri rice production
increased significantly from the previous year,
while Mississippi’s crop was off 14 percent be­
cause of planting delays attributed to spring flood­
ing (table 3).
Last year, U.S. rice production decreased
1 percent from the previous year because of a drop
in harvested acreage. Nonetheless, at 154.5 million
hundredweight (cwt), last year’s crop was relative­
ly large—up nearly 7 percent over the 1985-90
average (table 4). This increased production has
been stimulated in part because of a steadily in­
creasing domestic demand for rice, which has risen
at a 4.2 percent annual rate since 1986. Rice ex­
ports, the other primary demand component, are
expected to decline sharply in 1991-92, as they
have for each year since L988. For the 1991-92
marketing year, rice prices should average about
$7.50 per cwt, up 80 cents from 1990-91.
Soybeans
Soybeans are grown in each of the seven Dis­
trict states, and they are the second-largest crop,

16

Table 4
Supply and Demand of the Major Eighth District Crops in 1991-92 and Percent Change from 1990-911
Beginning Stocks

Production______ Domestic Use________Exports

Crop

Amount

Percent
Change

Amount

Percent
Change

Amount

Corn (million bushels)
Cotton (million bales)
Rice (million cwt)
Soybeans (million bushels)
Wheat (million bushels)

1,521.0
2.3
24.6
329.0
866.0

+ 13%
-2 2
- 6
+ 38
+ 62

7,474.0
17.6
154.5
1,986.0
1,981.0

- 6%
+ 14
- 1
+ 3
-2 8

6,345.0
9.4
94.8
1,335.0
1,210.0

Percent
Change Amount
+ 5%
+ 9
+ 3
+ 4
-1 2

1,550.0
6.8
60.0
690.0
1,250.0

Percent
Change
-1 0 %
-1 3
-1 5
+ 24
+ 17

1Periods are on a marketing year basis; market years are June to May for wheat, August to July for cotton and rice, and
September to August for corn and soybeans. Numbers for domestic use and exports are forecasts.
SOURCE: World Agricultural Supply and Demand, United States Department of Agriculture (May 1992).

behind corn, in terms of revenue. The value of
District soybean production last year was down 3.3
percent to $4.8 billion, as declines in production
occurred in Arkansas, Illinois, Kentucky and Ten­
nessee (table 3).
The weather that affected the nation’s corn
crop last year also affected the soybean crop. After
much early season promise, last year’s soybean
crop of almost two billion bushels was a little
more than 3 percent larger than 1990’s crop (table
4). Assisted by increasing meat production, domes­
tic consumption is forecasted to increase nearly
4 percent in the 1991-92 marketing year, while ex­
ports are projected to increase 24 percent because
of modest declines in world production and
agricultural credits extended to the former Soviet
Union. As a result, ending stocks are forecast to
decline to roughly 300 million bushels and soybean
prices are expected to be moderately higher than in
the previous marketing year; however, any hint of
weather uncertainty or additional export credits to
the former Soviet Union could push the average
marketing year price to the USDA’s top-end esti­
mate of $5.60 a bushel. Another boost could come
from this spring’s expected decrease in planted
soybean acreage—the smallest acreage planted
since 1976.
Wheat
Largely because of crop diseases in the na­
tion’s soft-red winter wheat belt (predominantly the
Midwest), U.S. wheat production in 1991 declined
by approximately 28 percent from 1990. This
resulted in the second-smallest wheat crop since
1978. Winter wheat production was curtailed sig­
nificantly in all District states, particularly in Mis­
sissippi, where last year’s production dropped by
71 percent (table 3). Elsewhere, winter wheat
crops in Arkansas and Tennessee were less than
half that of the previous year, while production in



Illinois, Indiana and Kentucky declined slightly
less. Missouri suffered the smallest relative
decline, with production falling 37 percent.
Total wheat supply in the United States
declined 13 percent last year. In fact, total supply
would have dropped much more were it not for
1990’s extremely large harvest, which boosted
1991-92 beginning stocks by 62 percent (table 4).
The 28 percent decline in 1991 production and the
expected 17 percent increase in exports, has
1991-92 ending stocks falling 58 percent to 366
million bushels; this would represent the smallest
level of ending stocks since 1974.
Given these bullish fundamentals, the average
price for the 1991-92 marketing year is expected
to increase to near $3 per bushel, up from the
previous marketing year average of $2.61 per
bushel. Significant purchases by the former Soviet
Union have boosted wheat prices since late last
year. Ameliorating further price increases, however,
are the large stocks possessed by Canada and the
European Community and the 12 percent decrease
in domestic demand because of a drop in wheat
used for feeding purposes. Overall, though, in
view of the forecasted increases in exports and the
relatively small level of ending stocks, relatively
strong wheat prices are expected into mid-1992. In
fact, the average price of wheat since June 1991—
the start of the wheat marketing year—has aver­
aged $3.18 a bushel, well above the previous year.
Beef Cattle
Beef production in the United States last year
totaled nearly 23 billion pounds. This was up
slightly from 1990 but marginally below that of
1989. In the District, beef production was higher
in Arkansas and Kentucky, but was virtually un­
changed to down slightly in the remaining District

17

states (table 3). Because of this increase in produc­
tion and the relatively large supply of competing
pork and poultry meat, beef prices in 1991 declined
from about 79 cents a pound to 74 cents a pound.
1992 forecasts point to a 1.1 percent increase
in beef production, as recent USDA statistics sug­
gest that cattle producers have responded to the
relatively high prices received during the past two
to three years by expanding their herds. Total cattle
on farms as of January 1, 1992, equaled 100.1 mil­
lion head—the highest level since 1987 and the third
consecutive yearly increase. Furthermore, given
the modest downward trend in per capita beef
consumption—down 28.5 percent from its 1976
peak—and the large supplies of competing meats,
beef producers may see prices fall yet some more.

Hogs
Expansion in pork production nationally began
in earnest last year and is expected to continue
quite strongly into 1992. Pork production in 1991
was up 4.2 percent from 1990, and it is expected
to rise nearly 8 percent in 1992 to an all-time
record of 17.2 billion pounds. Likewise, District
pork production generally rose last year, particu­
larly in the largest pork-producing states of Il­
linois, Indiana and Missouri (table 3).
Similar to beef prices, pork prices have been
relatively high in the last few years; rising from an
average of 43 cents per pound in 1988 and 1989 to
54 cents in 1990. With last year’s jump in produc­
tion, it was not surprising therefore to see the
average pork price decline to 49 cents a pound.
This price drop occurred chiefly because increases
in demand did not keep up with increases in sup­
ply. Although pork consumption in 1991 increased
2.3 percent and exports rose modestly, per capita
pork consumption only rose six-tenths of a pound
to 50.6 pounds; for 1992, the USDA is expecting
per capita consumption to rise to 54 pounds. Also,
like beef, large supplies of competing meats and
expected increases in pork production in the sec­
ond and third quarters of 1992 should moderate
any upward movements in hog prices. In fact, in
the first quarter of 1992, pork prices averaged 38
cents a pound, down from 51 cents a pound one
year earlier.
Poultry
The other large component of the domestic
livestock sector, especially in the Eighth Federal
Reserve District, is the poultry industry. In 1991,
the District poultry industry produced a little more
than $3.6 billion in broilers, turkeys, mature
chickens and eggs. Approximately 80 percent of
poultry production is concentrated in broilers, of
which Arkansas is the nation’s largest producer.



Last year, Arkansas’ poultry production rose
5 percent, substantially less than Mississippi and
Missouri but slightly above Indiana, the other large
poultry-producing states (table 3). Of particular in­
terest was the large jump in Kentucky’s poultry
production, which was due to a 14-fold increase in
broiler production.
Total U.S. poultry production last year
equaled 25.3 billion pounds, up 5 percent from
1990. Because of the large supply of beef, pork
and poultry expected on the market, the rate of in­
crease of poultry production in 1992 is expected to
slow slightly to 4.7 percent. In 1991, broiler
prices averaged 52 cents a pound, down two cents
from 1990 and seven cents from 1989. For 1992,
broiler prices are expected to fall slightly more, as
much as four cents a pound to 48 cents.
While competition among meats in 1992 will
be intense, poultry products seem to enjoy a con­
sumer advantage because of the perception that
they are “ healthier” than beef and pork. This
preference shows up in per capita poultry con­
sumption, which has increased at a 3.2 percent an­
nual rate since 1970; this compares with a 1.1
percent rate of decline for beef and a 0.4 percent
rate of decline for pork. In 1992, per capita poultry
consumption is expected to increase 4.6 percent.

Agricultural Finance: Improving
Balance Sheets
Table 5 looks at the U.S. farm balance
sheet since 1988 and what is currently being fore­
cast for 1992. As measured by the debt-to-asset
ratio, farmers continue to retire the debt they accum­
ulated in the 1970s and early 1980s. For example,
the farm debt-to-asset ratio has decreased by
almost one-third since 1985 and has not been this
low since 1964.
By definition, a decline in the debt-to-asset
ratio entails either a decline in debt and/or a rise
in the value of farm assets. In 1991, total farm
assets equaled $722.2 billion, which represented a
decline from the previous year of 2.3 percent. In
fact, figure 2 shows that real farm assets, of which
nearly three-quarters is farmland, have declined
sharply since peaking in 1979.5
The bright spot in farm finance is that both
farm real estate debt and non-real estate debt have
declined markedly in recent years. For example,
since 1985, real estate debt has declined at an an­
nual rate of 8.5 percent while non-real estate debt
has declined at a 6.5 percent rate. Last year, farm
real estate debt declined 4 percent, while non-real
estate debt dropped by 2.1 percent.
As with state farm income, state balance sheet
data are only available up to 1990. Nevertheless,

18

Table 5
U.S. Farm Balance Sheet
(Billions of 1987 dollars)
1988

1989

1990

$576.9
198.1
774.9

$558.2
198.1
756.2

$544.2
195.7
739.2

$533.3
188.8
722.2

74.7
59.4
134.2

69.5
57.0
126.5

65.0
55.9
120.9

62.4
54.7
117.1

$640.8

$629.7

$618.4

$605.1

Assets
Real Estate
Non-Real Estate
Total Farm Assets

1991 P

1992 F
$521 to $530
184 to 193
709 to 717

Liabilities
Real Estate
Non-Real Estate
Total Farm Debt

Total Farm Equity
Debt-To-Asset Ratio

0.167

0.173

0.164

60 to
53 to
113 to

63
56
118

$592 to $600
0.16 to 0.17

0.160

P = Preliminary F = Forecast
SOURCE: United States Department of Agriculture, Agricultural Outlook (May 1992), Table 30. Nominal numbers in original table
were deflated by the Gross Domestic Product implicit price deflator, 1987 = 100.
NOTE: Totals may not add due to rounding.

Figure 2

Total United States Farm Assets and Farm Debt *

60

62

64

66

* Includes operator households.




68

70

72

74

76

78

80

82

84

86

88

90

19

Table 6
Eighth Federal Reserve District Farm Finance Statistics
(Billions of 1987 dollars)
Farm Assets
State
Arkansas
Illinois
Indiana
Kentucky
Mississippi
Missouri
Tennessee

Farm Debt

Debt-to-Asset Ratio

1990

1989

1990

1989

1990

1989

$12.79
42.75
21.94
14.82
10.05
23.41
12.83

$13.03
43.67
22.60
15.50
10.42
23.87
13.47

$2.60
6.23
3.94
2.21
2.16
3.86
1.73

$2.61
6.59
4.25
2.37
2.43
4.07
1.81

0.18
0.129
0.159
0.132
0.19
0.146
0.12

0.185
0.139
0.173
0.141
0.215
0.158
0.124

SOURCE: Economic Indicators of the Farm Sector: State Financial Summary, 1990, United States Department of
Agriculture (December 1991).

the same trends in asset values seen nationally are
present for each of the District states. Table 6 in­
dicates that real asset values declined in 1990 in
each District state. The average decline was 3.1
percent, ranging from 1.8 percent in Arkansas to
4.8 percent in Tennessee. While real asset values
declined, the value of real farm debt fell much
more, so that debt-to-asset ratios declined in 1990
from 1989. On average, farm debt in the seven
District states declined by 5.8 percent.
The US DA expects this pattern to persist into
1992 (table 5). Farm real estate assets are expected
to drop from 0.6 percent to 2.3 percent; the range
of non-real estate assets goes from an increase of
2.2 percent to a decrease of 2.5 percent. Total
farm debt in 1992 is expected to drop about 3.5
percent or rise slightly. In accordance with the na­
tional trends, there is little reason to believe that
the District will not follow suit.

Agricultural Lenders
Performance of agricultural lenders in the
U.S. and the District were mixed last year. Bank
performance, like most other industries, suffers
during periods of recession and slow economic
growth—conditions that were certainly indicative of
1991’s economy. In addition, agricultural lenders
are directly affected by the agricultural economy.
Various bank performance measures are listed
in table 7 for the United States and for the in­
dividual District states.6 Return on assets (ROA)
and return on equity (ROE) were marginally
higher for all U.S. banks and for those agricultural
banks in Kentucky, Mississippi and Missouri last
year, but were generally unchanged to lower in the
remaining District states. Agricultural loan losses
at U.S. and most District banks increased in 1991,
although agricultural loan losses as a percent of



total agricultural loans increased much more at
District banks. Agricultural nonperforming loans as
a percent of total agricultural loans, while decreas­
ing slightly for U.S. farm banks, increased at most
District farm banks. It is typical for loan losses
and nonperforming loans to rise (relative to total
loans) in a recession because reduced economic ac­
tivity causes a slowing in sales, thereby increasing
default risk—especially for small businesses that
are common to the rural economy.
In addition to commercial banks, the federal
Farm Credit System (FCS) is an important lender
to the agricultural sector. The FCS continues to
recover from some of the difficulties it encoun­
tered in the early- to mid-1980s. In 1991, net in­
come of the FCS was $811 million—up significantly
from the previous year’s $608 million. Net interest
income, which is the primary source of the FCS’s
income, has grown for four consecutive years, ris­
ing to $1.6 billion in 1991. Continued loan restruc­
turing, improved lending practices and a goal to
aggressively compete in the agricultural loan mar­
ket has enabled the FCS as a whole to prosper in
recent years. Income performance, however, was
mixed in 1991 at the District’s two Farm Credit
Banks (FCB). The Louisville FCB reported net in­
come of $70.9 million, down 25 percent from
1990; the St. Louis FCB, on the other hand,
reported 1991 net income of $54.8 million, a jump
of 28 percent from 1990.7

Summary
The U.S. agricultural sector experienced a sec­
ond consecutive year of declining real farm income
last year. Declines in crop and livestock receipts
were the primary reasons, although government
support payments also dropped slightly. In 1992,

20

Table 7
United States and Eighth Federal Reserve District Agricultural Banking Data
U.S.
1991
Banks with negative earnings
Return on assets (ROA)
Return on equity (ROE)
Ag. loan losses/Total ag. loans
Ag. nonpf. loans/Total ag. loans1
Number of banks

161
1.05
11.25
0.30
1.67
3935

1990
205

1.02
10.96
0.23
1.74
4043

Illinois2
1991
1990
Banks with negative earnings
Return on assets (ROA)
Return on equity (ROE)
Ag. loan losses/Total ag. loans
Ag. nonpf. loans/Total ag. loans1
Number of banks

6
1.04
10.84
0.34
2.59
125

0
1.32
14.19
0.34
3.21

22

4
1.17
11.75
0.61
0.92
108

2
1.24
12.36
0.17
1.34

102

Indiana2
1991
1990

0
1.01

0
1.02

0.16

10.36
1.16

10.75
0.90

2.88

2.86

1.68
20

0
1.03

11.10

127

19

Mississippi2
1991
1990
Banks with negative earnings
Return on assets (ROA)
Return on equity (ROE)
Ag. loan losses/Total ag. loans
Ag. nonpf. loans/Total ag. loans1
Number of banks

Arkansas2
1991
1990

1
1.17
12.77
-0 .0 8
2.47
25

Missouri2
1991
1990
3
1.14
12.61
0.35

2.02
115

4

1.02
11.45
0.30
1.99

120

Kentucky2
1991
1990

2
1.12
11.88
0.24

2.11
61

5

1.11
11.65
0.17
1.59
62

Tennessee2
1991
1990
3
0.79
8.50
0.79
1.77
15

1
0.96
10.43
1.07
1.08
14

NOTE: Agricultural banks are defined as those banks with a greater-than-average share of total agricultural loans to total loans.
1Nonperforming loans include loans past due more than 89 days and nonaccrual loans.
2State data only include banks within the Eighth District; see the inside front cover of this publication for a map of this area.
SOURCE: Fourth-quarter FDIC Reports of Condition and Income for Insured Commercial Banks.

crop receipts are forecasted to decline slightly, but
weather, as always, will be a key determinant.
Livestock receipts will probably fall again in 1992
because of declining prices stemming from large
supplies of beef, pork and poultry. While declining
farm expenses last year contributed positively to
farm income, expenses will probably rise this year
because of a pickup in the national economy and

1Unless noted otherwise, farm income statement and
balance sheet numbers will be referred to in inflationadjusted terms using the Gross Domestic Product (GDP)
implicit price deflator; all real values are reported in
1987 dollars.
2The two series differ because net farm income includes
noncash income (for example, consumption of home-




an increase in expenses associated with an expected
larger 1992 corn acreage. While farmland values
seem to have stabilized in nominal terms, they
have yet to stabilize in inflation-adjusted terms;
thus, total farm assets continue to decline in value.
Conversely, farmers continue to retire debt at a
fast pace and reduce their debt-to-asset ratios
accordingly.

produced products) and noncash expenses such as
depreciation; it also accounts for the value of inventory
changes. Net cash income, on the other hand, is simply
gross cash income less cash expenses and excludes
noncash income and noncash expenses; it is the in­
come farmers use to purchase farmland and farm equip­
ment, retire debt and meet family expenses.

21

3The framework of existing federal farm programs is
such that, with most of the food and feedgrains, market
prices respond primarily to those factors which influence
supply and demand for the product. Thus, while farm
programs for such crops as corn, cotton and wheat do
not directly control market prices, they do significantly
influence supply. The price the farmer receives,
however, will probably differ from the market price if he
is in fact enrolled in the appropriate farm program, sim­
ply because he will be entitled to a “ deficiency pay­
ment” if the market price does not equal the program
“ target price.”
4The following discussion for Eighth District crops refers
to measures of supply (production) and demand (usage)
on a marketing year basis, as opposed to a calendar
year basis for livestock (January to December). See the
footnote to table 4 for the definition of the market year
for each crop. Although production takes place in a
given year (for example, corn and soybeans are harvest­
ed in the fall of each year), the crop is consumed during
the period from one harvest to the next.




5For a discussion of the recent trends in U.S. and Eighth
District farmland values, see Kevin L. Kliesen, “ Where
Are Farmland Prices Headed?” Pieces of Eight, Federal
Reserve Bank of St. Louis (September 1991), pp. 5-8.
6For a more in-depth analysis of the U.S. and Eighth Dis­
trict agricultural banking sectors in 1991, see Kevin L.
Kliesen, “ District Agricultural Banks Ride High in the
Saddle,” Pieces of Eight, Federal Reserve Bank of St.
Louis (March 1992) pp. 9-13.
H'he St. Louis and St. Paul Farm Credit Banks merged
to form AgriBank, FCB, and commenced operations in
St. Paul, Minnesota, on May 1, 1992.




22

Restructure and
Recession: A Year of
Transition
by Adam M. Zaretsky
Thomas A. Pollmann provided research assistance.

“Our recent economic problems are a reminder
that even a well-functioning economy faces the risk
of...setbacks. ”
—George Bush, Economic Report o f the President,
February 1992
“[The pace of economic recovery] has been little
more than glacial. ”
—Alan Greenspan, March 1992

w

y
y ith the economy already in recession,
1991 began with the continued threat of conflict in
the Persian Gulf. The threat became a reality
15 days later with a war that was swift, ceasing
before March, and considered decisive. Real Gross
Domestic Product (GDP), however, fell at an an­
nual rate of 2.5 percent in the first quarter (see
figure 1).
Many forecasted that the end of the war would
bring the beginning of economic recovery. Such
forecasts appeared to be accurate as the second
quarter of 1991 showed signs of improvement. The
return of soldiers from the Gulf brought momen­
tary increases in consumer confidence and spend­
ing. Real GDP grew at a moderate annual rate of
1.4 percent during the second quarter.
Meanwhile, other events revealed that the an­
ticipated recovery had little strength. Notices of
staff reductions, which had been circulating
throughout many firms in many industries, affected
many workers in an unprecedented number of oc­
cupations. Unemployment rates climbed and
numerous individuals, some for the first time,
faced job insecurity.
As usually happens, blue-collar workers with
production positions in durables manufacturing
suffered the most. Notably, more white-collar wor­
kers with professional and management positions
were cut than ever before. While some of these
losses were due to the declining demand associated
with the recession, others resulted from industries
and firms reorganizing to survive in an increasing­
ly competitive global market. These structural

changes caused many jobs to be eliminated perma­
nently.
Not surprisingly, the economy of the Eighth
District during 1991 behaved similarly to the na­
tional economy. The Eighth District grew little and
was not immune to the restructuring present in
many industries. Parts of the District, though, did
perform better than the nation, primarily due to
the types of industries located in those regions.
Key developments in the District and national
economies for 1991 are examined below.

Recessionary or Restructural?
Worker cutbacks, temporary as well as perma­
nent, were a pervasive feature of 1991, prompting
widespread concern about job security. Declining
demand for goods and services can explain the em­
ployment reductions; however, it is only a partial
explanation given current events. Industrial restruc­
turings contributed too.
The U.S. economy is currently undergoing
transformations not experienced since mass produc­
tion redefined manufacturing. These transforma­
tions are occurring in the context of global markets
and challenging fundamental ideas about “ conduct­
ing business,” as firms find that their competition
is not only from Louisville, Little Rock and Mem­
phis, but also from London, Frankfort and Tokyo.
It is toward this new global capitalism that today’s
firms are adjusting. Unfortunately, the timing for
the restructurings is not ideal because many of the
changes have occurred during the current reces­
sionary period.
To categorize changes in demand as recession­
ary or restructural, one must attempt to identify
the changes as either temporary or permanent, a
task easier explained than executed. Recessionary
changes are temporary losses in demand that will
be regained as the economy begins to expand. Res­
tructural changes are permanent losses in demand
caused by external factors, such as advances in
technology or changes in people’s preferences.
Restructuring requires firms to reorganize.
Dismissing employees is generally a key aspect of
reorganization. Of the many job losses in 1991, a
substantial proportion can be attributed to firms’
reorganization plans. For example, on December
18, 1991, General Motors announced its plan to
eliminate approximately 74,000 employees over the
next four years. One is hard-pressed to observe a
decline in demand so dramatic as to warrant this
magnitude of reduction. If these changes were be­
cause GM foresaw a temporary shift in demand,
the adjustments probably would not occur over a
four-year period.
Another example is the more than 10,000 wor­
kers McDonnell Douglas laid off, the majority of

23

Figure 1

ReaI U.S. GDP Compounded Annual Rates o f Change
Percent

1987

1988

whom were released during the latter half of 1990
and earlier part of 1991. These layoffs occurred
during the height of Operations Desert Shield and
Desert Storm, a period during which the United
States also witnessed the gradual diminution of the
Soviet Union as an adversary. The decline, and
eventual demise, of the Soviet Union instigated a
major reduction in the demand for defense-related
output. This changed international situation will
likely cause a shrinking national expenditure for
defense during the 1990s and a restructuring of
those firms engaged in defense-related production.
To prevent or, at least, minimize the effects on
these firms from a restructuring, many will pursue
production for the civilian market.
The recession has also taken its toll. When the
Armour Food Company announced the closing of
its Louisville plant in January 1991, citing obsoles­
cence and excess capacity at newer plants as rea­
sons for the shutdown, recessionary forces were at
work. When the Essex Group, Inc. closed its
Siloam Springs, Arkansas, factory because of poor
economic conditions, it too was reacting to reces­
sionary forces.
A firm’s decision to move its operations to
another part of the District, country or world is
more difficult to classify as recessionary or restructural. Many times, moving production to
another location is undertaken as a cost-reducing



1989

1990

1991

strategy. This strategy can be the result of slacken­
ing economic conditions. Possibly, though, the
move represents a decision that, from a long-run
profit-maximizing perspective, should have oc­
curred earlier. In this case, the onset of the reces­
sion only exacerbates the existing signals indicating
change.
Whether restructural or recessionary, the ef­
fects of the changes can be drastic in the shortrun. We will see, however, that the outcomes of
the two processes can differ. The next section,
detailing employment in the District and the na­
tion, launches our discussion into the long-run
trends of these markets.

District and National Employment
in Perspective
To refine the preceding description of employ­
ment changes, an overview of the relationship be­
tween the District and the nation is in order.
Figure 2 depicts employment concentrations for
both the District and nation in 1991. The numbers
represent the percentages of the nonagricultural
work force that are employed in each sector.
Overall, the District mirrors the nation with a few
noticeable exceptions.

24

Figure 2

Nonagricultural Employment by
Sector— 1991




EIGHTH DISTRICT
Mining

UNITED STATES
Mining
0.6

Retail Trade
23.3

The manufacturing sector is the most obvious
exception. While approximately 17 percent of all
nonagricultural workers in the United States were
employed in the manufacturing sector, about
21 percent of the District’s nonagricultural workers
were employed at manufacturing jobs. Between
1990 and 1991, the share of nonagricultural em­
ployment in manufacturing declined about 0.4 per­
centage points both regionally and nationally. A
second difference is that the District’s share of em­
ployment in the wholesale and retail trade sector
remained constant last year, while the same sector
declined nationally. Finally, the proportion of
nonagricultural workers in the finance, insurance
and real estate sector (FIRE) did not change last
year either nationally or regionally; however, this
sector’s percentage of District employment re­
mained significantly below its percentage of na­
tional employment.
Figure 3 presents three panels which demon­
strate the evolution of employment in the nation
and District over the past four years. (Note that
the left scales are for the District and the right
scales are for the United States.) The top panel
shows that District movements in total nonagricul­
tural employment were similar to national move­
ments. The nation, however, did record a sharp
drop in employment at the start of the current
recession, whereas District employment was rela­
tively stable until the first quarter of 1991. To
evaluate these movements, nonagricultural employ­
ment is separated into its components, non­
manufacturing and manufacturing employment, and
displayed in the middle and bottom panels of
figure 3.
The middle panel reveals that changes in Dis­
trict nonmanufacturing employment mirrored the
nation’s until the first quarter of 1990. At that time,
the District’s nonmanufacturing employment contin­
ued to grow while the United States’ declined and
then rose sharply until the start of the recession in
the third quarter of 1990. At that time, U.S. non­
manufacturing employment began a gradual decline.
Meanwhile, District nonmanufacturing employment
continued along its upward trend until the first
quarter of 1991. Between July 1990 and January
1991, District nonmanufacturing employment grew
at an annual rate of 0.5 percent, while national
nonmanufacturing employment fell 0.8 percent.
During 1991, District and national nonmanufactur­
ing employment exhibited little change.
The bottom panel shows that manufacturing
employment has undergone relatively larger
changes, fluctuating substantially more in the Dis­
trict than in the nation. (The difference in the
scales for the two series, however, slightly exag­
gerates these relative fluctuations.) U.S. manufac­
turing employment began its decline as early as the
first quarter of 1989, while District manufacturing
employment continued to grow until approximately

25

Figure 3

U.S. and District Quarterly
Employment Levels

Nonagricultural Employment

111
110

«

|

109

E.

108

c
v
E

107

the first quarter of 1990. The District’s sharp
decline did not begin until about the start of the
recession. It bottomed out by the second quarter of
1991, which some have suggested as the tentative
date for the end of the recession. The decline from
July 1990 until April 1991, however, resulted only
in an annualized 4.2 percent drop in the District’s
manufacturing employment levels. During the same
period, U.S. manufacturing employment fell at an
annualized 5.3 percent. In contrast, for the re­
mainder of 1991, District manufacturing employ­
ment did not change, while the United States
continued to lose these workers.

106 f
105
104 c/j

Long-Run Trends in Employment

Nonmanufacturing Employment
92

£

91

|

90

1

89
88

£

87
86

o'

85

w

|

|

CO

Manufacturing Employment

NOTE: Vertical lines represent peak of business cycle.




Recent employment changes reflect a trend
that has been present regionally and nationally for
a long time: the increasing importance of employ­
ment in the nonmanufacturing sector relative to the
manufacturing sector. Numerous examples of this
trend exist.
We have previously cited the effects of the
restructuring plans of two of the major manufac­
turing firms present in our regional economy,
General Motors and McDonnell Douglas. Both
firms specialize in the production of transportation
equipment and rely on a variety of other produced
durables for their inputs, such as electrical and
nonelectrical equipment. These industries employ
large numbers of production (assembly line) wor­
kers, most of whom are classified as semi-skilled,
unionized, and receiving high wages. We have also
already observed that many of these jobs have
been lost permanently in the current recession­
ary /restructural period. As these workers attempt
to become re-employed, they frequently find that
most of the available opportunities are in the non­
manufacturing sectors, where the job requirements
may not be compatible with the workers’ skills. As
a result, the job search is lengthened.
Another group experiencing high levels of un­
employment is professionals, such as engineers and
managers. Many of these workers also come from
manufacturing firms, but their re-employment
differs slightly from that of production workers.
While the professionals can be classified as skilled,
their work experiences may be too specific to be
valuable for other firms. Engineers laid off by
McDonnell Douglas, for example, are experienced
at designing defense-related output. Many firms,
therefore, are trying to incorporate these specific
skills into civilian rather than military production
to make them valuable. Managers may find that,

26

Figure 4

Seasonally Adjusted Quarterly Unemployment Rates
Percent

Annual
Averages

90
5 .5 %

91
6 .8%

90
5. 8%

91
6. 8%

90
6 .9 %

91
7 .4 %

while their skills are more transferable than en­
gineers’, the positions they are losing may not ex­
ist at firms in other industries because of an
economy-wide attempt to streamline and consoli­
date management.
The difficulties of moving labor from
manufacturing to nonmanufacturing industries,
along with the mismatch of those skills possessed
with the skills demanded, affect unemployment
rates. Movements in the unemployment rate for the
United States, the District, Arkansas, Kentucky,
Missouri and Tennessee are displayed in Figure 4 .1
While much of the increase in these unemploy­
ment rates can be attributed to cyclical factors (the
recession), a portion is also due to structural fac­
tors (the reorganizations). One effect of the struc­
tural component is that significant reductions in the
unemployment rate may not occur even as the
economy improves because it takes longer for
structurally unemployed people to find new jobs
than for cyclically unemployed people. This is not
to say that the full employment rate of
unemployment—the rate of unemployment that ex­
ists when the economy is producing at its potential
level of output—has increased, only that more time
may be needed to return to the full employment
rate of unemployment again.
Figure 5 demonstrates that the average dura­
tion of unemployment in weeks (the average



90
5 .8 %

91
7 .4 %

90
5 .7 %

91
6 .6 %

90
5 .2 %

91
6 .5 %

amount of time a person can expect to remain un­
employed) has steadily increased since mid-1989.
To substantiate the existence of an important struc­
tural component, however, we would have to ob­
serve a continued elevation of this number even
after the onset of economic recovery. This remains
to be seen.
Precise measurement of the full employment
rate of unemployment is controversial because it is
quite difficult to know exactly when an economy is
producing at its potential level of output. Neverthe­
less, most experts agree that the rate lies between
5 percent and 6 percent. How many jobs, then,
would have to be created to reduce the current un­
employment rate by approximately the two percen­
tage points needed to achieve the full employment
rate of unemployment? At a minimum, such a
reduction would require 2.5 million jobs national­
ly, with 160,000 of them in the Eighth District,
given a U.S. labor force of approximately 125 mil­
lion people and a District labor force of approxi­
mately eight million people.
This calculation is likely a low estimate of the
number of new jobs required to reach full employ­
ment because it assumes no further increases in the
number of unemployed persons. In addition, these
figures are conservative because they do not ac­
count for discouraged workers, individuals who
want to work, but who are not actively searching

27

Figure 5

Average Duration of Unemployment

1989

1990

1991

NOTE: Vertical line represents peak of business cycle.

for a job because of recessionary conditions.12 This
group is not counted in the official unemployment
statistic and, therefore, not included in the labor
force measurements.
To illustrate, suppose the 2.5 million jobs cit­
ed above were generated, and were filled by un­
employed workers. Discouraged workers, seeing
the job creation and the potential for finding a po­
sition compatible with their skills, now re-enter the
market by actively looking for a job. As these peo­
ple re-enter, they become included in the unem­
ployment statistic so that it may appear not to fall
even though jobs are being created and filled. This
might mean three or four million jobs would need
to be created to reduce the unemployment rate
rather than the 2.5 million estimated above. Not
knowing the rate of re-entry of these discouraged
workers makes an exact prediction difficult.
Hence, accounting for these discouraged workers
could increase the above estimates of job creation
significantly, depending on the size of the group.

1These states are used to represent the Eighth District
because they comprise more than the majority of the
District’s economic activity.
2For an explanation of discouraged workers and their ef­
fect on unemployment rates, see Adam M. Zaretsky,



Looking Backward and Forward
1991 was a year of transition. Unfortunately,
the economy suffered through a recession and a
restructuring. Some forecasters have suggested that
the recovery began during the second quarter of
1991 and expect the U.S. economy to continue im­
proving throughout 1992, especially during the se­
cond half of the year. The effects of the recession,
while unquestionably serious to the individuals af­
fected, were not too dramatic for the economy as a
whole. The effects of the restructuring, on the
other hand, will continue to be felt until firms and
individuals adjust their conceptions and expecta­
tions to the demands of the new system. Emerging
from this restructuring, however, we should find
an economy better equipped to compete in interna­
tional markets.

“ How Well Does Unemployment Explain the Low Levels
of Consumer Confidence?’’ Pieces of Eight - An Eco­
nomic Perspective on the Eighth District, Federal
Reserve Bank of St. Louis (March 1992), pp. 1-4.




28

Eighth District Business
Level

Payroll Employment (thousands)
United States
District
Arkansas
Little Rock
Kentucky
Louisville
Missouri
St. Louis
Tennessee
Memphis
Manufacturing
Employment (thousands)
United States
District
Arkansas
Kentucky
Missouri
Tennessee
District Nonmanufacturing
Employment (thousands)
Mining
Construction
FIRE2
Transportation3
Services
Trades
Government

1/1992

1/19911/1992

19 9 1 1

19901

108,844.0
6,935.3
965.5
259.8
1,489.0
490.7
2,301.9
1,157.7
2,187.9
473.9

-0 .3 %
0.8
-1 .2
1.5
0.7
1.0
1.4
0.8
1.1
-6 .2

-0 .3 %
-0 .1
1.4
1.1
-0 .3
-0 .1
-0 .4
-0 .5
-0 .3
- 1 .7

- 0.9%
-0 .3
2.8
1.6
1.0
1.9
-2 .1
-1 .9
-0 .5
0.8

1.5%
1.9
3.6
3.2
2.9
2.7
1.3
0.6
1.3
1.0

18,243.0
1,437.6
238.1
281.9
412.7
504.9

-2 .0 %
-2 .2
0.1
-1 .6
-0 .7
-4 .9

-1 .6 %
-0 .8
1.7
-0 .2
-1 .3
-2 .0

-3 .6 %
-2 .4
1.3
-1 .5
-5 .2
-2 .1

-1 .7 %

-1 7 .5 %
6.7
2.7

-1 1 .5 %
-2 .1
0.3
-1 .1
1.4
-0 .7
0.9

-4 .7 %
-5 .3
-0 .9
0.2
2.0
-0 .4
1.0

44.6
280.5
340.7
405.9
1,636.8
1,627.7
1,159.6
IV/1991

Real Personal Income4 (billions)
United States
District
Arkansas
Kentucky
Missouri
Tennessee

$3,538.1
195.8
25.7
42.8
67.8
59.5
1/1992

Unemployment Rate
United States
District
Arkansas
Little Rock
Kentucky
Louisville
Missouri
St. Louis
Tennessee
Memphis

Compounded Annual Rates of Change
IV/19911/1992

7.2%
6.6
7.0
6.2
6.9
5.3
5.7
6.2
7.1
6.1

0.0
1.7
1.3
1.2
111/1991IV/1991

IV /1990IV/1991

0.2%
1.4

-0 .2 %
0.7
2.0
1.4
-0 .4
0.8
Levels

0.0
1.9
2.4
0.7
IV/1991

6.9%
7.0
7.4
6.4
8.1
7.4
6.3
6.9
6.7
5.7

1991

6.7%
6.8
7.4
6.3
7.4
6.1
6.6
6.8
6.5
5.5

1991

-0 .1 %
-0 .5
0.8

0.0

0.0
0.8
1.0
-0 .5
- 0 .3

1.8%
0.7
0.9
1.9
4.6
1.0
2.8
1990

1.1%
0.8
1.2
1.7

-1 .6

0.0

0.0

0.9

1990

1989

5.5%
5.8
6.9
5.9
5.8
5.1
5.7
5.9
5.2
4.5

5.3%
5.8
7.2
6.3
6.2
5.5
5.5
5.5
5.1
4.7

Note: All data are seasonally adjusted. On this page only, the sum of data from Arkansas, Kentucky, Missouri and Tennessee
is used to represent the District.
1Figures are simple rates of change comparing year-to-year data.
2Finance, Insurance and Real Estate
^Transportation, Communications and Public Utilities
4Annual rate. Data deflated by CPI-U, 1982-84 = 100.

29

U. S. Prices
Level
1/1992

Compounded Annual Rates of Chanae
IV/19911/1992

/1991 1/1992

19911

19901

Consumer Price Index
( 1982-84 = 100 )

Nonfood
Food

138.9
137.3

3.20/0
1.2

3.20/0
1.3

4.5%
2.9

5.3%
5.7

140.7
153.3
127.3

4.10/0
-5 .1
-1 3 .6

-3.20/0
- 8 .2
3.2

- 2 .30/0
-5.2
2.4

1.1o/o
6.4
- 5 .4

171.0
189.0

-2 .3 %
0.0

-1 .2 %
0.5

1.5%
2.7

2.30/o
3.4

Prices Received by Farmers
(1 977 = 100)

All Products
Livestock
Crops
Prices Paid by Farmers
(1 9 7 7 = 100)

Production items
Other items2

Note: Data not seasonally adjusted except for Consumer Price Index.
1Figures are simple rates of change comparing year-to-year data.
2Other items include farmers’ costs for commodities, services, interest, wages and taxes.

Eighth District Banking
Changes in Financial Position for the year ending
March 31, 1992 (by Asset Size)
Less than
$100 million

SELECTED ASSETS
Securities
U.S. Treasury &
agency securities
Other securities1
Loans & Leases
Real estate
Commercial
Consumer
Agriculture
Loan loss reserve
Total Assets
SELECTED LIABILITIES
Deposits
Nontransaction accounts
MMDAs
Large time deposits
Demand deposits
Other transaction accounts2
Total Liabilities
Total Equity Capital

4.6%
7.4
- 5 .6
- 1 .7
3.5
- 8 .7
- 4 .0
2.9
8.0
0
-0 .1 %
- 2 .4
18.5
-1 4 .0
2.1
11.5
-0 .1
1.2

$100 million $300 million

14.0%

$300 million
$1 billion

17.50/o

17.6
3.0
- 1 .6
3.5
-1 1 .9
- 4 .0
22.9
5.1
3.4

24.1
- 3 .7
- 0 .9
9.5
-15.7
- 0 .3
3.3
5.4
4.0

3.1%
0.4
13.3
-1 3 .4
6.3
16.8
3.1
6.9

4.2o/o
1.8
14.2
■22.3
2.7
19.7
3.7
8.2

.

More than
$1 billion

46.9%
55.2
21.9
10.6
24.2
1.8
5.3
49.2
20.6
18.2
17.40/o
12.0
33.4
-2 8 .2
30.9
34.3
18.2
18.5

Note: All figures are simple rates of change comparing year-to-year data. Data are not seasonally adjusted. Note that some
changes are inordinately large because of thrift acquisitions by large District banks in 1991.
includes state, foreign and other domestic, and equity securities,
includes NOW, ATS and telephone and preauthorized transfer accounts.




30

Performance Ratios (by Asset Size)
Eighth District
1/92

EARNINGS AND RETURNS
Annualized Return on Average
Assets
Less than $100 million
$100 million - $300 million
$300 million - $1 billion
$1 billion - $5 billion
$5 billion - $15 billion
Agricultural banks
Annualized Return on Average
Equity
Less than $100 million
$100 million - $300 million
$300 million - $1 billion
$1 billion - $5 billion
$5 billion - $15 billion
Agricultural banks
Net Interest Margin1
Less than $100 million
$100 million - $300 million
$300 million - $1 billion
$1 billion - $5 billion
$5 billion - $15 billion
Agricultural banks
ASSET QUALITY2
Nonperforming Loans3
Less than $100 million
$100 million - $300 million
$300 million - $1 billion
$1 billion - $5 billion
$5 billion - $15 billion
Agricultural banks
Loan Loss Reserves
Less than $100 million
$100 million - $300 million
$300 million - $1 billion
$1 billion - $5 billion
$5 billion - $15 billion
Agricultural banks
Net Loan Losses4
Less than $100 million
$100 million - $300 million
$300 million - $1 billion
$1 billion - $5 billion
$5 billion - $15 billion
Agricultural banks

1/91

United States
I/90

I/92

1/91

I/90

1.05%
1.13
1.03
1.03
.99
1.35

.84%
1.05
.98
.94
.77
1.12

1.00%
1.03
1.05
.89
.66
1.17

1.00%
1.05
.97
.92
1.05
1.30

.68%
.88
.83
.87
.43
1.06

.69%
.93
.82
.72
.71
1.05

11.96%
13.45
12.85
15.07
15.13
14.01

9.59%
12.93
12.77
14.19
12.60
11.98

11.36%
12.91
13.34
13.69
10.13
12.51

11.23%
12.87
12.86
12.67
15.75
13.83

7.67%
10.92
11.01
13.05
7.24
11.52

7.83%
11.84
11.26
10.60
12.02
11.31

4.57%
4.46
4.52
4.18
3.99
4.46

4.25%
4.17
4.32
4.25
3.62
4.14

4.31%
4.24
4.46
4.05
3.63
4.17

4.83%
4.74
4.73
4.59
4.59
4.51

4.55%
4.52
4.54
4.41
4.20
4.24

4.67%
4.62
4.56
4.35
4.15
4.26

1.66%
1.62
1.51
1.40
2.04
1.80

1.64%
1.84
1.59
1.71
2.70
1.77

1.70%
1.68
1.45
1.82
1.95
1.83

2.09%
2.22
2.49
3.21
3.49
1.91

2.29%
2.19
2.62
3.36
4.67
1.93

2.16%
2.04
2.45
2.31
2.66
2.20

1.65%
1.66
1.60
1.99
2.06
1.68

1.44%
1.56
1.50
1.81
1.91
1.63

1.38%
1.52
1.40
1.76
1.56
1.65

1.73%
1.75
1.97
2.70
2.88
1.89

1.66%
1.61
1.87
2.34
2.75
1.85

1.55%
1.48
1.72
1.76
2.21
1.96

.57%
.43
.51
.76
.91
.24

.48%
.46
.66
.74
1.02
.26

.34%
.34
.40
.95
.68
.23

.47%
.49
.70
1.40
1.31
.25

.54%
.56
.86
1.36
1.60
.27

.52%
.46
.69
1.00
1.82
.31

Note: Agricultural banks are defined as those banks with a greater than average share of agriculture loans to total loans.
interest income less interest expense as a percent of average earning assets
2Asset quality ratios are calculated as a percent of total loans.
3Nonperforming loans include loans past due more than 89 days and nonaccrual loans.
4Loan losses are adjusted for recoveries and are annualized.