Regional Outlook
 

FEDERAL DEPOSIT INSURANCE CORPORATION FOURTH QUARTER 2000 

FDIC
 

Atlanta
 

Region
 

Division of
 

Insurance
 

Jack M.W. Phelps,
 

CFA
 

Regional Manager
 

Scott C. Hughes,
 

Regional Economist
 

Pamela R. Stallings,
 

Senior Financial
 

Analyst
 

Regional Perspectives 

◆ A large majority of FDIC-insured commercial banks in the Atlanta 

Region continue to rely heavily on intermediated earnings. A rate/volume 

analysis does not indicate a significant amount of interest rate risk during the past 

two years, despite large changes in the shape and level of the yield curve. In order to 

maintain or increase interest income, some community banks in the Atlanta Region 

may be assuming more credit risk as they are rapidly growing real estate and commercial and industrial lending portfolios. Interest rate risk may be on the rise as 

Atlanta Region community banks have increased the net duration of assets and 

reliance on noncore funding. See page 3. 

By the Atlanta Region Staff 

In Focus This Quarter 

◆ Emerging Risks in an Aging Economic Expansion—This article focuses 

on the potential risks of current economic conditions to insured depository institutions. Although the current conditions may appear to be ideal, some imbalances are 

emerging: rising energy prices, tight labor markets, a less robust stock market, a 

large trade deficit and strong U.S. dollar, rising household debt burdens, increased 

corporate leverage and rising potential default risk, and, in some metropolitan 

areas, overheated housing and commercial real estate markets. At the same time, 

aggregate risk within the banking industry appears to have risen, as evidenced by 

softening profitability, growing reliance on noncore funding, heightened levels of 

interest rate risk, and increasing concentrations in traditionally higher-risk loan 

categories. A confluence of these trends could heighten the vulnerability of some 

insured institutions. See page 8. 

By the Division of Insurance Staff 

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

Insurance Corporation as an information source on banking and economic issues for insured 

financial institutions and financial institution regulators. It is produced for the following eight 

geographic regions: 

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

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

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

Dallas Region (CO, NM, OK, TX) 

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

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

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

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

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

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

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

more information or to provide comments or suggestions about the Atlanta Region’s Regional 

Outlook, please call Jack Phelps at (404) 817-2590 or send an e-mail to jphelps@fdic.gov. 

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

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

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

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

the Federal Deposit Insurance Corporation. 

Chairman Donna Tanoue 

Director, Division of Insurance Arthur J. Murton 

Executive Editor George E. French 

Writer/Editor Kim E. Lowry 

Editors Lynn A. Nejezchleb 

Maureen E. Sweeney 

Richard A. Brown 

Ronald L. Spieker 

Publications Manager Teresa J. Franks 

REVISION: 

The article “Ranking Metropolitan Areas at Risk for Commercial Real Estate Overbuilding” in 

the Third Quarter 2000 issue of the Regional Outlook has been revised to correct a data-related 

error. The revision affects Chart 4 and Chart 11 of the report. Please see www.fdic.gov/bank/ 

analytical/regional/ro20003q/correction.html for revised versions of Chart 4 and Chart 11, along 

with an additional explanation of how the revision affects the article. 
Regional Perspectives
 

Regional Perspectives
 

•	 Despite its growing importance, noninterest or fee income represents almost 30 percent of FDIC-insured 

commercial bank income, and consequently, financial institutions continue to rely heavily on intermediated 

earnings, which may be exposed to interest rate risk. 

•	 A rate/volume analysis does not indicate a significant amount of interest rate risk among the Region’s community banks. However, an increase in the net duration of assets, the timing of interest rate changes, and a 

lag in the repricing of liabilities may understate the degree of risk. 

•	 The level of interest rate risk could increase because of greater reliance on nontraditional funding sources. 

Region’s Economic and Banking Conditions 

Interest Rate Risk Revisited 

Despite its growing importance, noninterest or fee 

income represents only 30 percent of FDIC-insured 

commercial bank income, and consequently, financial 

institutions continue to rely heavily on intermediated 

earnings, which may be exposed to interest rate risk 

(IRR). If current trends in the interest rate environment 

persist, net interest income (NII) among Atlanta Region 

commercial banks may be adversely affected. Factors 

influencing changes in NII were analyzed as part of the 

Atlanta Regional Outlook, second quarter 1998. The 

following discussion revisits the continued importance 

of IRR to commercial banks, paying particular attention 

to rate/volume analysis. 

The Changing Interest Rate Environment 

The interest rate environment faced by commercial 

banks has varied significantly during the past two years. 

Since mid-1999, the Federal Reserve Board has 

increased the Federal Funds target rate six times, as 

seen in Chart 1, to moderate the pace of economic 

growth. These rate hikes have contributed to a rise in 

short-term interest rates. Concurrently, actions by the 

U.S. Treasury to trim outstanding debt by repurchasing 

bonds have helped lower long-term interest rates. 

Together, the Federal Reserve and the U.S. Treasury 

policies have significantly affected the nation’s interest 

rate environment, as seen by the movement in the yield 

curve (see Chart 2). The 5.88 percent yield on a threemonth note on June 30, 2000, was 110 basis points 

above the year-ago mark. In contrast, 30-year rates were 

down 8 basis points during the same period. The rising 

short-term and declining long-term rates resulted in a 

CHART 1	 CHART 2 

Movement in the Federal Funds ...Has Contributed to Changes in the Yield Curve 

Targeted Rate...	 7.5 

7.5 Fed cuts the Target Funds rate	 7.0 

7.0 three times in the wake of the 

Actions by Treasury 

have contributed to 

lower long-term interest 

rates 

Yield curve shifts down as 

the Federal Reserve cuts 

rates in the wake of the 

Russian financial crisis 

The Federal Reserve increases Fed 

Funds Target rates, which helps push 

up the short end of the yield curve 6/30/98 

6/30/99 

6/30/00 

6­

Fed Funds Target Rate (EOP, %) 

6.5 

4.0 

Russian financial crisis 

Fed increases rates 

six times to slow the 

U.S. economy	 

4.0 

Yield* (percentage)

6.5 

6.0 

6.0 

5.5 5.5 

5.0 

4.5 

5.0 

4.5 

3.5 Jun Sep Dec Mar Jun Sep Dec Mar Jun 3.5 

3­ ’98 ’98 ’98 ’99 ’99 ’99 ’99 ’00 ’00 1- 2- 3- 5- 7- 10- 20- 30­

mo. mo. yr. yr. yr. yr. yr. yr. yr. yr. 

Note: EOP = end of period *Treasury constant maturities 

Source: Federal Reserve Bank (Haver Analytics) Source: Federal Reserve 

Atlanta Regional Outlook 3	 Fourth Quarter 2000 
Regional Perspectives
 

yield curve that was virtually flat. In fact, segments of 

the curve actually inverted, with the yield on the 30-year 

bond below all other maturities except the three-month 

treasury. By late September 2000, although long-term 

rates had recovered slightly, the overall slope of the 

yield curve remained negative. A financial market characterized by a prolonged flat or inverted yield curve typically is not considered the most conducive market for 

financial intermediaries, as they traditionally earn a 

positive spread by borrowing at lower rates at the short 

end of the curve and lending or investing at higher rates 

at the long end. 

Rate/Volume Analysis 

As discussed in Atlanta Regional Outlook, second 

quarter 1998, rate/volume analysis is “...one effective ex 

post approach to measuring interest rate risk.” A bank’s 

interest income is based on two components: the average volume of earning assets and the average yield. On 

the other side of the balance sheet, interest expense 

results from the average volume of interest-bearing liabilities and the average cost. Changes in interest income 

and interest expense can be determined through a 

rate/volume analysis, which isolates these components’ 

effects on NII over two time intervals. 

For Atlanta Region commercial banks, the rate/volume 

analysis suggests a minimal amount of IRR arising from 

changes in the yield curve during the past year. The 

analysis was applied to community bank data,1 and the 

results are presented in Table 1 for two four-quarter 

trailing time periods ending second-quarter 2000 and 

second-quarter 1999. This group, on average, experienced an increase in NII, and the net interest spread 

expanded from 3.73 percent to 3.83 percent. Asset 

yields rose faster than funding costs, in part because of 

the influence of rates. However, the majority of the 

increase in yield occurred in the investment portfolio, 

which represents a smaller share of earning assets, 

while the yield on the loan portfolio actually declined. 

Conversely, total funding costs remained virtually the 

same; however, notable differences exist among the various funding categories. The cost of historically ratesensitive or noncore categories—large time deposits, 

borrowed funds, and Federal Funds purchased— 

1 Includes Atlanta Region commercial banks with assets between 

$25 million and $1 billion. The data set contains 763 banks and 

excludes de novos (banks in operation less than three years), specialty banks, and banks involved in merger and acquisition activity. 

remained virtually unchanged. Core funding that normally is assumed to be less rate sensitive—small time 

deposits, savings, demand and money market 

accounts—experienced a decline in cost except for 

money market accounts, which saw the cost rise by 12 

basis points. Despite the lower cost of most funding 

sources, total funding costs increased nominally 

because of rapid growth in noncore funding. These noncore sources increased 25 percent while total interestbearing funds grew only 11.7 percent. As a result, 

noncore funding now represents a substantial and growing share of interest-bearing funding sources for community banks in the Atlanta Region at 24.1 percent, 

which may increase the sensitivity of net interest 

income to fluctuations in interest rates. 

In order to maintain or grow interest income, some 

community banks in the Atlanta Region may be assuming more credit risk. The greatest contributor to the 

growth in interest income was a significant increase in 

the volume of real estate and commercial and industrial 

(C&I) loans. During the past two years, real estate and 

C&I loans grew by 17.7 percent and 10.9 percent, 

respectively. Moreover, real estate loans as a share of 

earning assets rose from 38.8 percent to 41.3 percent. In 

contrast, at community banks nationwide, real estate 

loans grew 8.1 percent to 33.8 percent of earning assets, 

while C&I loans increased 3.8 percent to 17.6 percent 

of earning assets. At community banks in the Region, 

income from real estate lending occurred at lower marginal rates as the yield declined by 8 basis points to 9.0 

percent while most other asset yields were increasing. 

Construction and development lending, traditionally 

considered a higher-risk form of lending, is growing 

much faster among the Region’s community banks 

compared with their national peers. As a result, the 

decline in yield may suggest that lenders are not being 

adequately compensated on a risk-adjusted basis. 

Differences are evident when the rate/volume analysis 

is applied to community banks operating in various 

areas in the Atlanta Region. As seen in Table 2 (page 7), 

the yield or cost, composition, and growth rates in earning assets and funding at community banks vary substantially by location. Community banks headquartered 

in rural areas or nonmetropolitan statistical areas 

(MSAs) are characterized by yields and costs closer to 

the regional average, lower levels of lending, less 

reliance on noncore funding sources, and slower growth 

in funding sources. In contrast, community banks headquartered in urban areas or MSAs typically exhibit 

above-average yields and costs, higher levels of lending, 

Atlanta Regional Outlook 4 Fourth Quarter 2000 
Regional Perspectives
 

TABLE 1
 

Rate/Volume Analysis for Atlanta Region Community 

Banks* Depicts a Minimal Amount of Interest Rate Risk 

3Q98–2Q99 3Q99–2Q00 RATE/VOLUME ANALYSIS 

AVERAGE INCOME/ AVERAGE INCOME/ VOLUME/ 

BALANCE COST RATE BALANCE COST RATE VOLUME RATE RATE TOTAL 

ASSETS 

INTEREST-EARNING 

ASSETS 

SHORT-TERM 

INVESTMENTS: 

INTEREST-BEARING 

DEPOSITS 1,116,880 63,841 5.72% 975,663 58,867 6.03% (8,072) 3,546 (448) (4,974) 

U.S. GOVERNMENT 

SECURITIES 19,947,524 1,243,345 6.23% 21,486,291 1,387,757 6.46% 95,913 45,026 3,473 144,412 

SECURITIES BY 

OTHER 

SUBDIVISIONS 4,379,058 226,332 5.17% 4,774,000 242,336 5.08% 20,413 (4,044) (365) 16,004 

EQUITY 

SECURITIES (INCL. 

MUTUAL FUNDS) 503,385 34,857 6.92% 561,981 39,581 7.04% 4,057 597 69 4,724 

FED FUNDS 

SOLD/ 

REPURCHASED 4,870,634 246,528 5.06% 3,572,473 201,875 5.65% (65,702) 28,696 (7,648) (44,653) 

LOANS 

REAL ESTATE 37,016,323 3,359,299 9.08% 43,584,527 3,922,000 9.00% 596,077 (28,346) (5,030) 562,701 

COMMERCIAL 

& INDUSTRIAL 16,285,653 1,513,147 9.29% 18,053,813 1,688,982 9.36% 164,285 10,419 1,131 175,835 

CONSUMER 9,948,079 1,046,077 10.52% 10,815,864 1,112,113 10.28% 91,251 (23,192) (2,023) 66,036 

TOTAL LOANS 64,486,267 6,019,814 9.34% 73,688,100 6,824,156 9.26% 858,994 (47,827) (6,825) 804,342 

LEASE FINANCING 

RECEIVABLES 134,323 9,702 7.22% 247,691 16,530 6.67% 8,188 (738) (623) 6,828 

TOTAL INTERESTEARNING ASSETS 95,438,070 7,844,419 8.22% 105,306,297 8,771,102 8.33% 913,792 25,257 (12,365) 926,683 

LIABILITIES 

INTEREST-BEARING 

LIABILITIES 

INTEREST-BEARING 

DEPOSITS 

TRANSACTION 

ACCOUNTS 10,941,968 265,282 2.42% 11,416,696 270,363 2.37% 11,510 (6,161) (267) 5,081 

NONTRANSACTION 

ACCOUNTS 

MMDAS 9,968,756 344,476 3.46% 11,575,537 414,108 3.58% 55,523 12,150 1,958 69,632 

OTHER SAVINGS 9,179,718 267,160 2.91% 10,147,146 274,727 2.71% 28,155 (18,625) (1,963) 7,567 

TIME DEPOSITS 

> $100K 12,486,427 686,411 5.50% 14,349,212 787,906 5.49% 102,402 (789) (118) 101,495 

TIME DEPOSITS 

ALL OTHER 31,312,804 1,704,378 5.44% 33,109,769 1,773,745 5.36% 97,810 (26,889) (1,544) 69,367 

FED FUNDS 2,362,782 109,252 4.62% 3,401,392 180,877 5.32% 48,024 16,394 7,207 71,625 

OTHER BORROWED 

MONEY 1,931,944 132,544 6.86% 3,319,962 227,212 6.84% 95,227 (325) (234) 94,668 

TOTAL INTERESTBEARING LIABILITIES 78,184,398 3,509,503 4.49% 87,319,713 3,928,938 4.50% 438,651 (24,256) 5,040 419,435 

CHANGE IN NET 

INTEREST INCOME 17,253,672 4,334,916 3.73% 17,986,584 4,842,164 3.83% 475,140 49,513 (17,405) 507,248 

* Includes Atlanta Region commercial banks with assets between $25 million and $1 billion. The data set contains 

763 banks and excludes de novos, specialty banks, or banks involved in merger and acquisition activity. 

MMDA = money market deposit accounts 

Source: Bank Call Reports 

Atlanta Regional Outlook 5 Fourth Quarter 2000
 
Regional Perspectives
 

greater reliance on noncore 

funding, and more rapid 

growth in funding, particularly noncore funding. The 

majority of community 

banks in the six metropolitan areas detailed in Table 

2 rapidly expanded real estate lending and use of noncore funding. As a result, funding costs rose more rapidly than the regional average, and community banks in 

Atlanta, Birmingham, Raleigh, and Southwest Florida have funding costs well above average. On the yield 

side, community banks in Atlanta are well above the 

regional average, while community banks in the other 

five MSAs approximate the regional average. Despite 

the vast differences in structure (yield and cost levels 

and balance sheet composition) for community banks in 

these locations, changes in rate did not exert a significant influence on the change in NII. Furthermore, all 

areas relied greatly on an expansion in real estate lending to support interest income. However, the differences 

in structure, particularly the greater reliance on noncore 

funding by urban community banks, could heighten levels of IRR. In any event, the growing use of noncore 

funding could increase the complexity of IRR management, as these sources typically reprice differently than 

other sources, a concept referred to as basis risk. 

Although this analysis of past performance does not 

identify a significant amount of IRR, an increase in the 

net duration of assets, the timing of changes in the yield 

curve, and a lag in repricing of assets or liabilities could 

mask the degree of IRR. Community banks appear 

more susceptible to IRR as the net duration of assets 

and liabilities has extended. As seen in Chart 3, since 

the third quarter of 1998, the net duration of assets 

(repriceable assets less repriceable liabilities) with a 

repricing period of more than one year has increased 

from 27.2 percent of earning assets to 38.7 percent. 

Moreover, funding with a repricing period of less than 

one year has increased from 53.9 percent of earning 

assets to 65.9 percent. The timing of interest rate 

changes in tandem with the repricing structure of the 

assets and liabilities can significantly affect the level of 

IRR. Specifically, the yield curve did not shift upward 

and twist until early 2000. As a result, we expect the 

spread to expand during this period, because community banks typically hold significantly larger volumes of 

immediately repriceable assets (i.e., adjustable-rate 

loans) than liabilities. As liabilities reprice, we expect 

the net interest spread to narrow, given the interest rate 

environment. A quarterly rate/volume analysis, in fact, 

supports the lag effect, as the spread peaked at 4.08 percent during fourth quarter 1999 and subsequently 

declined to 3.99 percent by second quarter 2000. Therefore, the level of IRR risk may be greater than the longterm rate/volume analysis suggests, and margins may be 

under more pressure going forward. 

Risks and Implications 

While the rate/volume analysis has yet to show a material variation in NII, the full effect of changes in the 

yield curve probably has not manifested because of a 

lag in the repricing of liabilities. If the level and shape 

of the current yield curve remain constant, net interest 

spreads are likely to narrow over time. The substantial 

growth in longer duration assets (loans) and shorter 

duration liabilities (noncore funds) may be beneficial if 

CHART 3 

Net Asset Durations Have Increased at Atlanta Region Community Banks* since 1998 

Repriceable Assets Less

Repriceable Liabilities to

Earning Assets 

* Includes Atlanta Region commercial banks with assets between $25 million and $1 billion. The data set contains 763 banks and excludes banks open less than three 

years, specialty banks, and banks involved in merger and acquisition activity. Data are as of June 30, 2000. Yield or cost and share data is for trailing four quarters, 

and growth rates are based on trailing four-quarter averages. 

Source: Bank Call Reports 

Less than 1 Year 1 to 5 Years Over 5 Years 

–25.0% 

–12.5% 

0.0% 

12.5% 

25.0% 

9/30/1998 

6/30/2000 6/30/1999 

Atlanta Regional Outlook 6 Fourth Quarter 2000 
Regional Perspectives
 

TABLE 2 

The Yield or Cost, Composition, and Growth Rate of Earning Assets and Funding 

Vary by Location for Community Banks1 in the Atlanta Region 

SUBMARKET 

GREENVILLE– SW NONREGION ATLANTA BIRMINGHAM SPARTANBURG RALEIGH TAMPA FLORIDA2 MSA 

YIELD/COST 

REAL ESTATE LOANS 9.00 9.95 9.13 8.77 9.39 8.81 8.27 9.04 

C&I LOANS 9.36 9.56 8.43 9.19 8.91 9.50 8.86 9.33 

TOTAL LOANS 9.26 9.83 9.31 9.07 9.38 9.05 8.61 9.39 

EARNING ASSETS 8.33 8.85 8.55 8.23 8.48 8.16 8.08 8.37 

INTEREST-BEARING 

FUNDS 4.50 4.78 4.98 4.58 4.04 4.13 4.64 4.57 

NET INTEREST 

SPREAD 3.83 4.07 3.57 3.65 4.44 4.03 3.44 3.80 

SHARE OF 

EARNING ASSETS 

REAL ESTATE LOANS 41.4 43.2 44.9 42.5 49.9 47.8 35.9 40.5 

C&I LOANS 17.1 17.8 15.1 23.2 16.9 19.8 24.8 16.6 

TOTAL LOANS 70.0 73.0 74.9 73.5 75.0 71.2 76.2 68.9 

SHARE FUNDS 

CORE DEPOSITS 75.9 67.9 68.6 74.2 80.1 81.5 75.6 77.6 

NONCORE SOURCES 24.1 32.1 31.4 25.8 19.1 18.5 24.5 22.4 

GROWTH RATE 

REAL ESTATE LOANS 17.7 25.5 23.5 20.8 15.7 28.2 25.6 13.4 

TOTAL LOANS 14.3 23.6 3.5 21.8 17.5 26.4 22.2 11.0 

CORE DEPOSITS3 7.9 12.1 12.3 10.7 12.7 14.4 15.1 5.4 

NONCORE 

SOURCES4 25.6 41.6 35.9 32.6 27.9 43.0 40.5 23.1 

ALL FUNDING 

SOURCES 11.7 20.2 18.8 15.7 15.3 18.8 20.5 8.9 

1 Includes Atlanta Region commercial banks with assets between $25 million and $1 billion. The data set contains
 

763 banks and excludes banks open less than three years, specialty banks, or banks involved in merger and acquisition activity. Data are as of June 30, 2000. Yield or cost and share data are for trailing four quarters, and growth
 

rates are based on trailing four-quarter averages.
 

2 Includes Sarasota–Bradenton, Punta Gorda, Fort Myers–Cape Coral, and Naples metropolitan statistical area (MSA).
 

3 Includes time deposits under $100,000, negotiable order of withdrawal (NOW), savings, and money market accounts.
 

4 Includes time deposits over $100,000, Federal Funds purchased, and other borrowed money.
 

C&I = commercial and industrial
 

short-term rates fall and the yield curve becomes positively sloped. However, there is no guarantee that this 

will happen. For example, a recent survey of economists 

by USA Today 2 shows that two-thirds expected lower 

interest rates during the first half of 2001. The article, 

however, pointed out that a number of economists 

believe that indications of a soft landing may be prema2 September 29, 2000. Interest rates likely to be cut next year, survey 

says. USA Today, 1B. 

ture and that the Federal Reserve actually may have to 

hike interest rates or leave them unchanged in 2001 to 

combat the potential of rising inflation. In short, as is 

often the case, it is not clear which way interest rates 

will move; as a result, extending long-term assets and 

shortening liabilities is a wager that could easily have a 

heavy cost. 

—Atlanta Region Staff 

Atlanta Regional Outlook 7 Fourth Quarter 2000 
In Focus This Quarter
 

Emerging Risks in an Aging Economic Expansion
 

•	 The economy and the banking and thrift industries are reporting generally healthy conditions. 

However, the economic expansion is aging, and it 

is unlikely that the vigor experienced during the 

first half of 2000 can be sustained. 

•	 Likewise, record banking and thrift industry 

profits, healthy capital cushions, and good asset 

quality of recent years may not be sustainable. 

Declining net interest margins, rising commercial 

loan losses, tighter liquidity, and riskier asset 

composition are among the warning signs that 

industry performance may have peaked for this 

business cycle. 

•	 Specific areas of concern include growing reliance 

on noncore funding; heightened interest rate risk; 

increased exposure to market-sensitive revenues; 

deteriorating credit quality; rising leverage 

among businesses and households; and signs of 

imbalance in some residential and commercial 

real estate markets. 

Although no readily apparent situations or imbalances 

suggest that a recession or widespread banking problems will develop in the near term, warning signs are 

present. A highly competitive banking industry shapes 

the environment in which pressures on insured institutions are unfolding. The presence of a large share of 

newly chartered banks in some areas appears to be raising the risk profile among all institutions in certain markets. Publicly owned companies remain under intense 

pressure to grow earnings and increase shareholder 

value. In addition, local banking environments exist in 

which a confluence of risks is generating heightened 

vulnerability for all participants, even during healthy 

economic times. Complacency in these environments 

may have negative repercussions for many insured institutions going forward. 

Imbalances Are Appearing amid a Healthy 

Macroeconomic Environment 

The performance of the U.S. economy contributes to the 

opportunities and risks financial institutions face. The 

current cyclical expansion, now nine and one-half years 

old, is displaying signs of aging while setting a record 

for longevity. A consensus forecast calls for moderate 

real gross domestic product (GDP) growth through 

2001, following robust gains in the first half of 2000. 

Current conditions might be called a “soft landing,” in 

which real GDP growth slows to a sustainable noninflationary rate of 2.5 to 3.5 percent, and unemployment 

hovers around recent rates. 

Although the current macroeconomic environment 

might appear to be the best of all possible worlds, areas 

of concern exist. One is that sustained prosperity tends 

to foster higher levels of risk taking, overconfidence, 

and complacency. For example, the turmoil in world 

foreign exchange and financial markets during 1997 

and 1998 illustrates how dramatic imbalances can 

develop and trigger disruptive adjustments even during 

healthy economic times. 

Currently, no specific situation or imbalance seems to 

threaten the viability of the expansion. However, as 

detailed below, several likely will contribute to slower 

economic growth. Situations that warrant monitoring 

include the following: 

•	 The repercussions from higher energy prices are 

unfolding. Historically, oil price shocks have weakened several other long-lived economic expansions. 

•	 Short-term interest rates rose over the past year while 

longer-term rates declined, resulting in a modest 

inversion of the yield curve. This relationship may 

inhibit the profitability of some lenders’ practice of 

borrowing short term and lending longer term and 

also complicate the interest rate risk management 

process for some insured institutions. 

•	 Continuing low unemployment suggests that demand 

for additional workers will go unfilled, thus limiting 

economic growth or triggering bidding wars that 

increase workers’ compensation and, potentially, 

inflation. 

•	 Stock market sentiment is no longer strongly bullish. 

A pullback from high valuations and optimism could 

trigger negative repercussions on consumers’ net 

worth and spending as well as on the level of business investment. 

•	 A large international trade deficit and strong U.S. 

dollar may be an unsustainable combination over the 

Atlanta Regional Outlook 8	 Fourth Quarter 2000 
In Focus This Quarter
 

long run. Meanwhile, repatriated profits of U.S. corporations are being trimmed by the dollar’s strength 

relative to the euro and other currencies. 

•	 Household debt burdens are historically high, with 

leverage rising the most in recent years among lowand middle-income households. These households’ 

access to credit has increased as lenders competed 

more fiercely for customers. 

•	 Corporations are more highly leveraged, and potential default risk rose in the past year across a range of 

industries. Meanwhile, downgrades of publicly traded corporate debt issues are exceeding upgrades by a 

2 to 1 ratio. 

•	 In some metropolitan areas, overheated housing markets are developing, in which home prices are rising 

dramatically and exceeding gains in median 

incomes. 

•	 Potential signs of excess commercial real estate construction are appearing in several urban areas where 

banks’ construction loan growth also is strong. 

Economic indicators of what lies ahead are not clearcut, and each possible scenario contains a set of potential challenges for insured institutions and regulators. 

Should economic growth slow considerably, current 

vulnerabilities, such as highly leveraged borrowers’ 

debt loads and overheated housing markets, could worsen significantly. As evidenced by the rash of bank failures during the 1980s, it doesn’t always take a national 

recession for problems to develop. Alternatively, sustained rapid growth might foster new vulnerabilities and 

allow current imbalances to intensify or build up. For 

example, speculative construction could accelerate, 

stock market volatility could increase, or ballooning 

trade deficits could generate turmoil in foreign 

exchange markets. 

Signs of Strain Are Also Appearing 

amid Healthy Banking and Thrift Industries 

With the long economic expansion as a backdrop, 

insured institutions in the aggregate are performing 

very well. However, the record profits attained in recent 

years may not be sustainable. The losses posted recently by several large institutions are striking examples of 

increased appetite for risk resulting in significant financial loss during a period of strong economic growth. 

While these are isolated instances, they are indicative of 

the increasingly competitive environment facing the 

financial services industry. 

Overall industry profitability is beginning to soften, led 

primarily by rising commercial loan losses at large institutions and declining net interest margins in institutions 

of all sizes. Credit card loss rates, which had been 

steadily falling since late 1997, have stalled in recent 

quarters, suggesting that recent increases in interest 

rates and energy costs not only are affecting businesses 

but also are taking a toll on some consumers. Other 

signs suggesting that aggregate risk within the system 

has risen include the growing reliance on noncore funding to support asset growth, heightened interest rate risk 

at many institutions, growing concentrations in traditionally higher-risk loan classes, and a shift in institutions’ overall asset mix toward higher-risk categories. A 

brief discussion of these risks follows. 

Funding Patterns Heighten Liquidity Concerns 

Lackluster core deposit growth is placing pressure on 

bank earnings and contributing to rising liquidity risk in 

the banking system. During the past five years, the compounded annual rate of core deposit growth for all 

insured institutions was just 2.8 percent. Assets over this 

time grew at a 6.6 percent rate. Accordingly, a significant portion of the industry’s growth has been funded by 

noncore sources (see Chart 1). The higher cost and rate 

sensitivity of these funds put downward pressure on net 

interest margins, particularly in a rising rate environment. 

CHART 1 

Most of $2 Trillion of Asset Growth since 1995
 

Was Funded with Noncore Funds
 

Subordinated Debt 

and Other Liabilities

 5% 

9% 

Equity 

22%
 

Core Deposits
 

64%
 

Noncore Funding
 

Source: Bank and Thrift Call Reports, June 2000 and June 1995 

Atlanta Regional Outlook 9	 Fourth Quarter 2000 
In Focus This Quarter
 

To compensate for higher funding costs, the industry 

has pursued growth in higher-yielding asset classes that 

are traditionally both riskier and less liquid. For example, almost 37 percent of the asset growth in the past 

five years has come from nonresidential real estate and 

commercial and industrial loans. 

For institutions that fund illiquid assets with wholesale 

sources, any adverse events that trigger a lack of confidence in the institution may result in higher funding 

costs, thus placing further pressure on margins. In 

efforts to obtain funding, an institution also may pledge 

a greater portion of its best quality assets as collateral, 

further reducing liquidity. Finally, in instances where 

funding needs have exceeded available liquidity, the 

forced sale of illiquid assets to meet funding outflows 

could result in losses if market conditions are unfavorable. Presumably, the FDIC, as insurer, would suffer 

greater losses if such an institution failed, because it 

would be relying on proceeds from the liquidation of 

less liquid, and potentially lower-quality, assets to satisfy 

the claims of insured depositors. 

Subprime lenders, in particular, tend to rely heavily on 

noncore funding to pursue aggressive growth strategies. 

Chart 2 illustrates the extent to which noncore funding 

exceeds the level of liquid assets for this group. The 

chart suggests the difficulty these institutions may 

encounter if forced to convert assets to meet funding 

outflows. Although subprime lenders may use noncore 

sources to fund riskier assets to a greater extent than the 

industry at large, this illustration exemplifies a systemic 

trend that is raising liquidity risk industrywide and is 

increasing risk to the insurance funds. 

Increasing Levels of Interest Rate Risk 

Challenge Some Institutions 

The refinancing boom of the late 1990s spurred a significant shift into longer-maturity assets for many 

insured institutions. During this period, a vast majority 

of mortgage borrowers opted for longer-term, fixed-rate 

loans, which they obtained at historically low rates. A 

great deal of the higher-rate or adjustable-rate loans that 

borrowers refinanced were held in the portfolios of 

insured institutions, which contributed to a general 

lengthening of the maturity of assets held at insured 

institutions. 

The trend toward longer-term, fixed-rate assets has been 

particularly pronounced among mortgage lenders. For 

example, state-chartered savings banks, which are traditionally mortgage lenders, have experienced a dramatic 

increase in long-term assets. As of June 30, 2000, 

almost 45 percent of the median savings bank’s earning 

assets were not scheduled to reprice for five years or 

longer (see Chart 3). 

Fixed-rate mortgage-related assets at federally chartered thrifts have risen similarly. From year-end 1995 

through first quarter 2000, the percentage of fixed-rate 

mortgage-related assets at thrifts with assets less than 

$1 billion rose from 49 percent to 60 percent of 

mortgage-related assets. Some thrifts and savings 

banks, therefore, have significant exposure to rising 

rates from low-yielding long-term assets. 

CHART 2 $ Billions 

Source: FDIC Division of Supervision and Bank and Thrift Call Reports (data are 

merger adjusted) 

Subprime Lenders’ Growing Dependence

 on Noncore Funding Strains Liquidity 

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

0 

30 

60 

90 

All other loans 

Residential real estate loans 

Securities and shortterm investments 

Columns: Noncore funding 

CHART 3 

Growing Concentration in Long-Term 

Assets Elevates Interest Rate Risk 

Source: Bank Call Reports, excluding Thrift Financial Report filers 

Share of Assets Maturing or Repricing in Five Years or Longer 

Relative to Total Earning Assets (median percentage) 

Percent 

Savings Banks 

Commercial Banks 

50 

0 

10 

20 

30 

40 

’89 ’90 ’91 ’92 ’93 ’94 ’95 ’96 ’97 ’98 ’99 ’00

Atlanta Regional Outlook 10 Fourth Quarter 2000 
In Focus This Quarter
 

While most commercial banks do not have as high 

exposure to rising rates as savings banks, some may 

have taken on significant risk. The median savings bank 

has a ratio of long-term assets to earning assets that corresponds to the ratio level for the 93rd percentile of 

commercial banks. Although the 93rd percentile is in 

the tail of the commercial bank distribution, almost 600 

commercial banks have a concentration in long-term 

assets that exceeds that of the median savings bank. 

These institutions may be exposed to significant interest rate risk as well. 

While assets have lengthened considerably for many 

institutions, there has not been a corresponding extension of liabilities. To the contrary, funding pressures are 

tending to make bank liabilities more rate sensitive. 

These diverging trends generate concern, especially in a 

rising interest rate environment. That is, rate increases 

drive up the cost of funds more rapidly than earning 

asset yields at institutions with liability-sensitive interest rate risk postures. In a significantly higher interest 

rate environment, many institutions’ current postures 

likely would cause heavy margin erosion. 

Most institutions that have high concentrations in longterm assets also have strong capital and an asset mix 

that contains lower credit risk than that of many other 

institutions. Among savings banks, interest rate risk primarily arises from significant concentrations in residential mortgage loans, whereas the typical commercial 

bank’s exposure is more likely to arise from large holdings of long-term securities. However, some institutions 

with concentrations in long-term assets also may have 

lower capital levels, a higher-risk asset mix, or poor 

earnings. Rising rates could weaken these institutions 

and make it more difficult for them to weather adverse 

economic or other developments. 

Dependence on Market-Sensitive Revenues 

Increases Earnings Volatility for Some 

Institutions 

During the recent generally favorable conditions in financial markets, the share of revenue earned from business 

lines susceptible to financial market volatility has 

increased substantially for some of the industry’s largest 

institutions. Among these revenue sources are fees and 

gains from asset management, brokerage, investment 

banking, venture capital, and trading activities. The 19 

institutions most active in these lines of business earned 

over 26 percent of their net operating income from such 

sources in the second quarter of 2000. Other large institutions also have reported a growing dependence on these 

volatile sources of revenue. 

Turbulence in the financial markets has led to greater 

earnings volatility for some of these institutions. Stress 

in the financial markets could weaken the demand for 

underwriting services or significantly reduce trading 

revenues or venture capital gains. Furthermore, the 

same factors that are causing volatility in the financial 

markets could hamper loan growth and lead to slower 

revenue growth from core business lines. Should 

increased earnings volatility from exposure to marketsensitive revenues combine with slower revenue growth 

from core business lines, some institutions could face 

significant earnings challenges. 

The Rising Level of Problem Business Loans 

Is Centered in Large Banks 

Second quarter 2000 commercial and industrial (C&I) 

credit quality indicators at banks deteriorated for the 

eighth consecutive quarter. Noncurrent C&I loans— 

those on nonaccrual status plus those 90 days or more 

past-due—rose 13 percent over first quarter 2000 levels 

to $14.5 billion, or 1.4 percent of total C&I loans. Noncurrent loan levels for the period ending June 2000 were 

40 percent higher than the year-earlier level. Net C&I 

loan loss rates also continue to edge higher but remain 

well below those experienced by banks in the late 1980s 

and early 1990s.1 

Large banks, particularly those active in syndicated 

lending, are bearing the brunt of deteriorating C&I loan 

quality. Recent increases in criticized and classified 

shared national credits (SNCs), which are loans exceeding $20 million that are shared among three or more 

lending institutions, are illustrated in Chart 4. In the 

2000 SNC review, criticized and classified credits 

increased 44 percent over 1999 levels to 5.1 percent of 

total SNC commitments. Furthermore, the bulk of the 

increase was in the more severe classified categories, 

which now comprise 64 percent of total criticized and 

classified credits, compared with 54 percent at the yearearlier review. 

11

During second quarter 2000, banks posted an annualized net C&I 

loss rate of 0.67 percent, up from 0.55 percent for second quarter 

1999. For comparison purposes, net quarterly annualized C&I loss 

rates averaged 1.11 percent from fourth quarter 1991 to fourth quarter 

1993. 

Atlanta Regional Outlook 11 Fourth Quarter 2000 
In Focus This Quarter
 

CHART 4 

Note: C&I = commercial and industrial; SNC = shared national credit 

Source: Shared National Credit Program 

Syndicated Loan Problems Are on the Rise 

Percent

$ Billions 

’90 ’91 ’92 ’93 ’94 ’95 ’96 ’97 ’98 ’99 ’00 

Criticized and 

Classified SNC Loan 

Commitments (right 

scale) 

Percentage of SNC 

Commitments Criticized 

and Classified (left scale) 

0 

2 

4 

6 

8 

10 

12 

14 

16 

0 

20 

40 

60 

80 

100 

120 

140 

C&I loan quality indicators continue to deteriorate 

despite generally favorable economic conditions. Three 

factors explain much of this deterioration: certain weak 

industries, rising corporate debt burdens, and the seasoning of syndicated loans underwritten from 1997 to 

1998, when many banks significantly eased business 

lending standards. 

Industry Sector Weaknesses 

The financial stresses facing healthcare and entertainment companies (cinema operators in particular) have 

been well publicized. While the healthcare and entertainment sectors have contributed significantly to the 

decline in commercial credit quality, problems within 

these two sectors do not account for the full extent of 

the increase in noncurrent loans and problem SNC 

loans. Both of these sectors are within the broader services sector, which experienced a $4.6 billion increase 

in criticized and classified credits from the 1999 to the 

2000 SNC review. However, this increase accounts for 

only 15 percent of the $30.8 billion increase in criticized and classified SNCs overall.2 The expected 

default probabilities evident in market-based information can be used to identify other industry sectors experiencing financial stress. KMV LLC has developed a 

model that uses publicly available information to estimate the likelihood of default of individual firms.3 

2 See the interagency release of SNC results at www.occ.treas.gov/
 

ftp/release/2000-78a.pdf.
 

3 KMV Credit Monitor® uses information from a firm’s equity prices
 

and financial statements to derive KMV’s Expected Default Frequency (EDFTM), which is the probability of the firm defaulting within a
 

one-year period. The main determinants of a firm’s likelihood of
 

default: the firm’s asset value, the volatility of the firm’s asset value,
 

and the degree of financial leverage.
 

KMV’s model is used by many lenders to monitor and 

evaluate obligor risk and credit risk trends. Applied to 

the analysis of industries, the output of KMV’s model is 

just one of a number of indicators that suggest weaknesses in certain industry sectors. 

Sectors that include a high proportion of firms with 

high default probabilities (median one-year default 

probabilities exceeding 4 percent) are shown in Chart 5. 

Using entertainment as an example, the bars in the chart 

show that in September 2000, one-half of publicly held 

entertainment firms had greater than an 8 percent 

chance of defaulting on their obligations within one 

year. In September 1999, this same proportion of entertainment companies had a substantially smaller (6 percent) chance of defaulting within a 12-month period. 

The median likelihood of default for all the industries 

shown in the chart far exceeds that of Standard & 

Poor’s-rated, BB-grade (sub-investment-grade) obligors 

as of September 2000, as indicated by the dotted line in 

the chart. 

Rising Corporate Debt Burdens 

U.S. corporate debt burdens, as measured by the debtto-net-worth ratio for nonfarm, nonfinancial businesses, 

continue to increase. This ratio reached 83 percent in 

the second quarter of 2000, up from 72 percent as of 

year-end 1996. Although debt burdens remain below the 

1988–1992 average of almost 87 percent, U.S. businesses are nevertheless becoming increasingly vulnerable to rising credit costs and disruptions in credit 

availability. 

CHART 5 Median Expected Default Frequency (EDFTM) (percent) 

Various Industries Show High Levels 

of Expected Default Risk 

Comparative EDFTM

 of S&P Bonds Rated BB 

(as of September 2000) 

Source: Credit MonitorTM ©2000, KMV LLC, all rights reserved 

Entertainment 

HealthcareWholesale Trade 

Apparel &Textile

Misc. Manufac. LodgingMining 

AgricultureConstruction 

Retail

0 

1 

2 

3 

4 

5 

6 

7 

8 

9

 September 1999

 September 2000 

Atlanta Regional Outlook 12 Fourth Quarter 2000 
In Focus This Quarter
 

Seasoning of 1997–1998 Vintage Loans 

Results of recent supervisory surveys suggest that 

banks are tightening terms and conditions on loans to 

small-, middle-, and large-market obligors. However, 

this tightening follows a relaxation of standards in prior 

years that has contributed to a heightened level of risk 

in banks’ loan portfolios.4 Not coincidentally, the period 

between 1995 and 1998 saw a sharp rise in the proportion of lower-graded, higher-risk credits categorized as 

leveraged transactions by Loan Pricing Corporation. 

Leveraged loan originations—those priced at 150 basis 

points or more over the London Inter-Bank Offer Rate 

(LIBOR)—rose from 12 percent of total syndicated 

loan originations in 1995 to 31 percent in 1999. According to a recent Standard and Poor’s commentary, many 

banks have acknowledged that 1997 and 1998 vintage 

credits are beginning to produce higher problem loan 

levels.5 

Household Sector’s Leverage Is High, 

and Imbalances Are Appearing 

Consumers are enjoying the benefits of the economic 

expansion, as jobs are plentiful, home ownership 

remains generally affordable, and credit seems to be 

readily available for financing motor vehicles and other 

major purchases. These conditions contributed to record 

high sales of cars and light trucks during the first nine 

months of 2000, helping sustain the consumer spending 

growth shown in Chart 6. One corollary of high vehicle 

sales, however, is softening prices for used vehicles. 

Consequently, some lessors—including banks—are 

realizing lower-than-expected residual values on leased 

vehicles, which, in turn, are triggering losses in their 

lease portfolios. This situation illustrates one problem 

that lenders can encounter even in good economic 

times. 

Spending growth remained robust in recent quarters 

even as gains in disposable income slowed. The gap 

between income and spending growth is “financed” as 

households draw down savings, tap capital gains, refinance mortgages, assume more debt, or undertake some 

combination of these measures. 

4 See Federal Reserve Board’s Senior Loan Officer Opinion Survey on 

Bank Lending Practices for May and August 2000 and Surveys of 

Credit Underwriting Practices for 1999 and 2000 from the Office of 

the Comptroller of the Currency. 

5 “U.S. Bank Loan Portfolios Reflect Rise in Corporate Bond 

Defaults.” July 20, 2000. Standard and Poor’s Commentary. 

CHART 6 

Household Spending Growth 

Exceeds Income Growth 

Source: Bureau of Economic Analysis via Haver Analytics, Inc. 

Real Consumption Spending 

Real Disposable Income 

7 

–1 

0 

1 

2 

3 

4 

5 

6

Annual Growth Rate (percent) 

’86 ’87 ’88 ’89 ’90 ’91’92 ’93 ’94 ’95 ’96 ’97 ’98 ’99’00 

Quarter 3 

From 1995 through 1998, and likely since then, the 

increase in both leverage and debt servicing burdens has 

been concentrated among low- and middle-income 

households. Among families holding debt in 1998, debt 

payments exceeded 40 percent of disposable income for 

nearly 20 percent in the $10,000 to $24,999 income 

group and nearly 14 percent in the $25,000 to $49,999 

group.6 One concern is that these debt-laden families 

may have inadequate financial resources to make payments should adverse conditions or job loss occur. In 

such instances, lenders could be doubly affected if 

households draw on their credit card and home equity 

lines of credit, further compromising their repayment 

ability, in order to sustain spending in excess of income. 

The recent rise in credit card losses in banks’ card portfolios and rising losses in the portfolios of subprime 

lending specialists may indicate that strains among 

some households are spilling over to lenders. Moody’s 

Investors Service expects credit card losses to rise 

through 2001, according to a recent analysis of 

prospects for the U.S. credit card industry. 

Overheated residential real estate markets in several 

metropolitan statistical areas (MSAs) may be another 

warning of economic imbalances. Dramatic gains in 

home resale prices in San Francisco stand out (see Chart 

7), but this market is not alone in experiencing appreciation considerably higher than income growth. In 

some markets, where financial-services or informationtechnology workers are concentrated, bidding wars for 

properties may reflect the fact that affordability is 

6 Kennickell, Arthur B., Martha Starr-McCluer, and Brian J. Surette. 

January 2000. “Recent Changes in U.S. Family Finances: Results 

from the 1998 Survey of Consumer Finances.” Federal Reserve 

Bulletin. Vol. 86, 1–29. 

Atlanta Regional Outlook 13 Fourth Quarter 2000 
In Focus This Quarter
 

enhanced by gains in wealth rather than in income. 

Even so, similar surges in home resale prices in the 

past often were not sustainable. The subsequent years 

of stagnant or falling collateral values caused financial 

stress among some homeowners and their lenders. 

Further concern about residential real estate lenders 

arises because pockets of speculative construction 

under way in some markets may produce units that 

become increasingly difficult to sell at anticipated asking prices. 

Construction and Development 

Loan Growth Is Accelerating 

Commercial real estate (CRE) construction across all 

property sectors has grown during this expansion, with 

office construction particularly active. The amount of 

office space completed in mid-2000 was the largest 

since 1989 and is projected by Torto Wheaton Research 

to continue rising. Not surprisingly, construction and 

development (C&D) loan volume, growth rates, and 

concentrations are trending upward rapidly. While total 

private real estate spending grew about 6.5 percent over 

the four quarters ending midyear 2000, C&D loans at 

insured institutions rose by 26 percent. C&D loan 

growth has remained above 20 percent since 1997, and 

the aggregate volume of C&D loans is the highest since 

1989. 

Such growth is contributing to higher concentrations of 

C&D loans relative to Tier 1 capital. At current levels, 

concentrations do not begin to approach those of the 

late 1980s. However, several metropolitan areas have a 

CHART 7 

Median Home Resale Prices Soar 

in San Francisco Bay Area 

Percent Change from

Four Quarters Earlier 

Quarter 1 

–10 

–5 

0 

5 

10 

15 

20 

25 

30 

35 

’80 

’82 

’84 

’86 

’88 

’90 

’92 

’94 

’96 

’98 

’00

large percentage of insured institutions reporting high 

and rising concentrations. Table 1 (next page) shows 

MSAs with at least 15 nonspecialized community 

banks7 and at least one-third of those institutions reporting concentrations in C&D loans equal to at least 100 

percent of Tier 1 capital. The Atlanta MSA stands out. 

Sixty-five percent of Atlanta’s 85 nonspecialized community institutions reported C&D loans exceeding 100 

percent of Tier 1 capital on June 30, 2000, and 35 percent reported a concentration exceeding 200 percent. 

The aggregate C&D concentration for all 85 institutions 

in the MSA was 156 percent, the highest among MSAs 

with at least 15 institutions of similar size and nature. 

Several other markets also include significant shares of 

institutions with high concentration levels. 

Nine of the 16 markets highlighted in Table 1 not only 

have a relatively high percentage of C&D loan exposure but also appear vulnerable to overbuilding in two 

or more property types.8 While these markets show no 

clear signs of emerging economic stress, lenders there 

clearly may be at greater risk should economic or real 

estate conditions sour. Other concerns regarding CRE 

lending arise from a recent Office of the Comptroller 

of the Currency survey, which reports heightened 

credit risk in CRE portfolios and predicts it will 

increase through 2001. In addition, respondents to a 

midyear 2000 FDIC survey of examiners reported 

more frequent comments about excess office and retail 

space. 

Increasing Share of De Novo Institutions 

Raises the Stakes in Some Markets 

A common element among the metropolitan markets 

listed in Table 1 (next page) is the presence of newer 

institutions. In 10 of the 16 markets, at least 20 percent 

of the nonspecialized community institutions are less 

than three years old. The drive to build market share 

among these institutions, particularly if they are publicly traded entities, is increasing the competitive pressure on banks and thrifts in these markets. In some 

instances, the aggregate cost of deposits within the 

MSAs has risen faster than in the nation as a whole, risk 

7 The term “nonspecialized community bank” refers to institutions 

with total assets under $1 billion that are not specialty institutions 

such as credit card or trust banks. 

8 See “Ranking Metropolitan Areas at Risk for Commercial Real 

Estate Overbuilding,” Regional Outlook, third quarter 2000, which 

identifies markets where new construction is high relative to existing 

stocks of space. 

Source: National Association of Realtors via Haver Analytics, Inc. 

Atlanta Regional Outlook 14 Fourth Quarter 2000 
In Focus This Quarter
 

TABLE 1 

High C&D Loan Exposure Appears in Various MSAs 

SHARE (%) OF AGGREGATE C&D LOANS 

MSAS WITH 15 OR INSTITUTIONS* WITH C&D RELATIVE TO AGGREGATE 

MORE NONSPECIALIZED CONCENTRATIONS > OR = TIER 1 CAPITAL (AS %) 

COMMUNITY INSTITUTIONS* 100% OF TIER 1 CAPITAL IN THIS MSA* 

ATLANTA, GA 65 156 

PHOENIX–MESA, AZ 56 131 

MEMPHIS, TN–AR–MS 52 154 

PORTLAND–VANCOUVER, OR–WA 47 146 

OAKLAND, CA 47 163 

NASHVILLE, TN 44 103 

RIVERSIDE–SAN BERNARDINO, CA 42 110 

SAN DIEGO, CA 41 90 

GRAND RAPIDS–MUSKEGON–HOLLAND, MI 40 81 

SEATTLE–BELLEVUE–EVERETT, WA 39 98 

SALT LAKE CITY–OGDEN, UT 38 56 

FORT WORTH–ARLINGTON, TX 38 110 

DALLAS, TX 36 95 

LAS VEGAS, NV–AZ 35 119 

LEXINGTON, KY 34 80 

DENVER, CO 33 113 

*Sample includes institutions with total assets under $1 billion that are not specialty institutions such as credit 

card or trust banks. 

Note: Boldface indicates major MSAs identified at risk for excess commercial real estate construction in Regional 

Outlook, third quarter 2000. 

C&D = construction and development, MSA = metropolitan statistical area 

Source: Bank and Thrift Call Reports for June 30, 2000 

profiles are being elevated, and aggregate leverage ratios 

are falling, despite the influx of capital from the new 

institutions. Highly competitive environments have the 

potential to increase risk taking by negatively affecting 

underwriting standards and balance sheet composition. 

Farm Sector Challenges Continue 

Much of the agricultural industry is experiencing 

stress because of low commodity prices, compounded 

in some areas by low yields resulting from weather- or 

disease-related problems. Strong global competition 

and high worldwide production during the past several years have resulted in large crop inventories, 

depressed prices, and limited prospects for a price 

turnaround in the near term. In the aggregate, record 

levels of government payments have helped the 

nation’s farms maintain a generally stable financial 

condition but have not eliminated the stress in this sector. In fact, the U.S. Department of Agriculture projects that at least one in four farm businesses in several regions9 will not cover net cash expenses in 2000, 

suggesting that the viability of highly leveraged farmers may be in question. 

Fortunately, the aggregate condition of nearly 2,100 

insured agricultural banks—institutions with 25 percent 

or more of loan portfolios in agricultural credits— 

remains healthy. Generally, agricultural banks continue 

to report favorable asset quality, earnings, and capital 

positions. However, they are experiencing somewhat 

elevated levels of noncurrent loans compared with 

nonagricultural institutions. Agricultural banks are disproportionately represented among the weakest 25 percent of institutions nationwide in terms of noncurrent 

9 These are USDA’s Basin and Range, Mississippi Portal, Fruitful 

Rim, and Southern Seaboard regions. See www.ers.usda.gov/ 

briefing/farmincome/fore/regional/regional.htm. 

Atlanta Regional Outlook 15 Fourth Quarter 2000 
In Focus This Quarter
 

loan levels. In addition, rising levels of carryover debt at 

farm banks may translate into higher losses in the future 

if commodity prices remain low. 

The strains in the farm sector also have implications for 

nonfarm banks in agricultural areas. In several agriculturedependent states, such as Montana and the Dakotas, for 

example, where farmers’ earnings are depressed and the 

economies not well diversified, nonagricultural banks 

are reporting higher noncurrent levels than insured 

institutions elsewhere in the nation. 

Summary 

The long-lived economic expansion has contributed to 

the banking and thrift industries’ record levels of profitability and asset quality. However, as the expansion has 

matured, both consumer and corporate leverage has risen 

considerably. Bank liquidity is becoming increasingly 

strained by lackluster core deposit growth, which has 

been insufficient to fund strong loan demand. This trend 

has resulted in a decided shift into higher-risk asset 

classes to mitigate margin pressures arising from the 

greater reliance on noncore-funding sources. Furthermore, interest rate risk has risen significantly for many 

institutions, and after nearly a decade of improving asset 

quality, the level of problem loans is increasing. 

Clearly, high levels of profitability in recent years have 

been achieved, in part, by an increased appetite for risk. 

Concern arises because insured institutions’ current 

profitability is being negatively affected by some recent 

trends, despite the sustained economic expansion. And, 

while capital levels have remained fairly stable, the 

amount of risk being leveraged on the industry’s capital 

base is on the rise. Just as a rising tide is said to float all 

boats, a strong economy can mask potential problems 

that will become evident should the economic tide turn, 

particularly in institutions or markets where aboveaverage risk is concentrated. Insured institutions’ safety 

and soundness may be most vulnerable in situations 

where banks and thrifts are exposed to multiple challenges, whether because of strategic decisions or 

because of repercussions from economic and banking 

forces beyond their control. 

Daniel Frye, Regional Manager 

Joan D. Schneider, Regional Economist 

Steve Burton, Senior Banking Analyst 

Allen Puwalski, Senior Financial Analyst 

Ronald Spieker, Chief, Regional Programs 

and Bank Analysis 

The authors would like to acknowledge 

the Washington and regional staff of 

both the Division of Insurance and 

the Division of Supervision for their 

analyses and comments, which were 

instrumental in writing this article. 

Atlanta Regional Outlook 16 Fourth Quarter 2000 
✁
 

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