Regional Outlook
 

FEDERAL DEPOSIT INSURANCE CORPORATION FOURTH QUARTER 2000 

FDIC
 

Dallas
 

Region
 

Division of
 

Insurance
 

Alan C. Bush,
 

Regional Manager
 

Adrian R. Sanchez,
 

Regional Economist
 

Jeffrey A. Ayres,
 

Senior Financial
 

Analyst
 

Stephen L. Kiser,
 

Economic Analyst
 

Regional Perspectives 

◆ A growing imbalance between family incomes and escalating housing prices in the rapidly growing Denver, Boulder, Colorado Springs, 

and Austin metropolitan statistical areas could pressure affordability 

and constrain future economic growth. See page 3. 

◆ Insured financial institutions in the Dallas Region have experienced 

a large relative increase in loan volume and a migration into traditionally higher-risk assets, and are facing the potential for heightened levels of credit risk. See page 9. 

◆ The Region’s insured institutions report an allowance for loan and 

lease losses that has lagged loan growth, particularly among institutions 

experiencing the most rapid growth rates. See page 11. 

By the Dallas 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 14. 

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 Dallas Region’s Regional 

Outlook, please call Alan Bush at (972) 761-2072 or send an e-mail to abush@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
 

•	 A growing imbalance between family incomes and escalating housing prices in some of the Region’s fastestgrowing metropolitan statistical areas could pressure affordability and constrain future economic growth. 

•	 Insured financial institutions in the Region have experienced a large relative increase in loan volume and a 

migration into traditionally higher-risk assets and are facing the potential for heightened levels of credit 

risk, particularly if the economy slows. 

•	 The Region’s insured institutions report an allowance for loan and lease losses (ALLL) that has lagged loan 

growth, particularly among institutions experiencing the most rapid growth rates. 

Are Housing Costs Getting Out of Hand? 

The booming economy of the 1990s was characterized 

in the Dallas Region by the rapid rise of many new hightech industries; robust growth in the financial services 

sector in tandem with increases in personal wealth and 

income; burgeoning international trade resulting from 

the implementation of the North American Free Trade 

Agreement; and an almost insatiable demand for residential, commercial, and industrial space that drove 

increasing levels of construction activity. Supporting 

this economic growth was a substantial in-migration of 

businesses and residents seeking to benefit from the 

Region’s competitive advantages, including lower housTABLE 1 

ing costs and strong job growth. Table 1 shows that most 

metropolitan statistical areas (MSAs) in the Dallas 

Region continued to outperform the nation in employment, personal income, and population growth. Today, 

however, these competitive advantages have eroded over 

time, caused by the same rapid growth that made the 

Dallas Region boom initially, and now threaten to constrain future growth in some areas. In particular, the 

rapid increase in housing costs in a few MSAs is creating concern among local officials and residents about 

housing affordability and economic growth. 

Many of the Dallas Region MSAs Outperformed the United States 

(Average Annual Growth Rate 1994 through 1999) 

MSA EMPLOYMENT PERSONAL INCOME POPULATION 

GROWTH GROWTH GROWTH 

ALBUQUERQUE 2.97 6.02 1.28 

AUSTIN–SAN MARCOS 5.73 9.47 3.51 

BOULDER–LONGMONT 4.07 8.40 1.94 

COLORADO SPRINGS 5.27 8.17 2.39 

DALLAS 4.38 8.35 2.04 

DENVER 3.87 7.98 1.98 

FORT WORTH 3.80 6.85 2.15 

HOUSTON 3.35 7.17 1.91 

OKLAHOMA CITY 2.90 4.97 0.87 

SAN ANTONIO 3.55 6.83 1.83 

SANTA FE 1.73 6.08 (11.16) 

TULSA 2.95 5.35 1.07 

UNITED STATES 2.57 5.63 0.94 

Sources: RFA/Economy.com; Bureau of Labor Statistics (Employment Growth); Bureau of Economic Analysis (Personal 

Income Growth); Census Bureau (Population Growth) 

Dallas Regional Outlook 3	 Fourth Quarter 2000 
Regional Perspectives
 

The relationship between employment growth and 

home appreciation values reflects the strength of individual housing markets. We examined 12 MSAs in the 

Dallas Region over a five-year period (1995–2000). A 

strong positive correlation exists between employment 

growth and rising home prices1 (see Chart 1). 

The MSAs of Austin–San Marcos, Boulder–Longmont, Colorado Springs, and Denver were among the 

leaders in employment growth and home price appreciation and are the focus of this section as we explore 

whether housing costs are indeed getting out of hand. 

We will look first at the factors that drive housing 

demand and supply and determine housing prices. 

Factors Influencing Housing Demand 

The demand for housing is strongly influenced by at 

least three factors: (1) demographic shifts (population 

growth, net migration, and the expansion and contraction of households); (2) rising and falling employment; 

and (3) wealth and income. These factors, interacting 

with changes in the supply of housing and economic 

conditions (e.g., interest rates), influence the pace of 

housing construction, and ultimately home prices. 

CHART 1 

New housing demand is fueled by population growth, 

particularly households migrating directly into the area. 

All four MSAs were among the fastest-growing in the 

United States during the 1990s. Austin–San Marcos, 

ranked sixth in the nation in population growth, grew at 

an annual rate of 3.4 percent, followed by Colorado 

Springs (18th) with an annual growth rate of 2.6 percent. Denver (34th) and Boulder–Longmont (38th) each 

posted annual growth rates of 2.2 percent. In comparison, U.S. population growth averaged 0.9 percent annually throughout the 1990s. The Austin–San Marcos 

MSA added nearly 300,000 new residents during the 

1990s, and the combined MSAs of Denver, 

Boulder–Longmont, and Colorado Springs added over 

half a million residents.2 

Net domestic in-migration accounted for much of this 

population growth (see Chart 2, next page) and represented 42 to 57 percent of the total gains in population 

experienced by these MSAs from 1991 through 1999.3 

Population growth generated by natural increase (births 

minus deaths) does not necessarily lead to immediate 

demands for new housing units. However, significant 

increases in domestic in-migration will likely strengthen demand for housing in the short term, as these households must establish new residences. 

Conventional Mortgage Home Price Index

Annualized, 1Q95 to 1Q00 (percent) 

A Strong Positive Relationship Exists between Employment Growth and Rising Home Prices 

y = 0.9265x + 0.0169

R 2 = 0.4123 

8 

7 

6 

5 

4 

3 

2 

1 

0 

9 

Santa Fe 

Albuquerque 

San Antonio 

Oklahoma City 

Tulsa 

Fort Worth 

Houston 

Dallas 

Colorado Springs 

Austin–San Marcos Boulder–Longmont 

Denver 

0 1 2 3 4 5 6 

Payroll Employment Growth Rate, Annualized 1Q95 to 1Q00 (percent) 

Sources: Bureau of Labor Statistics (Haver Analytics); Federal Home Loan Mortgage Corporation 

1 The following linear regression model developed by the Dallas Region office was estimated:
 

Y = + X 1 , , where Y is the dependent variable Conventional Mortgage Home Price, X is the independent variable Payroll Employment
 0 1 1 + I 1 

Growth Rate (MSA), and are unknown parameters, and , is the error term. This model proved to be statistically significant, with the inde­ 0 1 I 

pendent variable explaining 41 percent (R2) of the variation in the dependent variable. The model home price appreciation can be calculated by
 

manipulating the equation Y = 0.9265x + 0.0169.
 

2 Texas A&M Real Estate Center, http://recenter.tamu.edu/data/.
 

3 Ibid.
 

Dallas Regional Outlook 4 Fourth Quarter 2000 
Regional Perspectives
 

CHART 2 CHART 3 

Domestic In-migration Was a Major Driver of All Four MSAs Have Ranked among the 

Rapid Population Growth in the 1990s Top 10 Percent in the Nation in 

Employment Growth since 1994 

Percent 

Austin–San Colorado Denver Boulder– 0 

10 

20 

30 

40 

50 

60 

70 

80 

90 

100 

9% 3% 11% 14%

42% 46% 49% 57% 

45% 43% 38% 33% 

9% 

Nonfarm Payroll Employment Growth,

1Q94 to 2Q00 (percent)

17.9% 

28.0% 28.9% 

37.0% 

41.4% 

0 

5 

10 

15 

20 

25 

30 

35 

40 

45 

Marcos Springs Longmont 

Foreign Domestic Natural Statistical 

Immigration In-migration Increase Discrepancy United Boulder– Denver Colorado Austin– 

States Longmont Springs San 

Note: Figures may not add to 100 percent.
 

Sources: Census Bureau; Texas A&M Real Estate Center
 

Attracting these new migrants were strong underlying 

economies characterized by rapid job growth, low 

unemployment rates, and high median family incomes. 

The four MSAs ranked among the top 10 percent of 

more than 300 U.S. MSAs in nonfarm employment 

growth since 1994 (see Chart 3). Moreover, they have 

experienced very low levels of unemployment—from 

2.1 percent to 3.3 percent as of July 2000—compared 

with the U.S. unemployment rate of 4 percent.4 Strong 

job growth and low unemployment are two major reasons why a large influx of new residents moved to these 

MSAs during the 1990s. The in-migration of new residents created an immediate demand for new housing as 

opposed to population growth generated by natural 

increase alone. 

A key similarity among the four MSAs is their strong 

reliance on high-tech industries (see third quarter 2000 

Dallas Regional Perspectives). Households in these 

MSAs also share an above-average reliance on stock 

market gains (often used to finance home purchases), 

another reason why housing demand has performed so 

strongly in these markets. According to an article written by RFA/Economy.com’s chief economist Mark 

Zandi entitled “Judging Regional Economies,” differences in regional economic performance can be 

explained, in part, by the “new economy”; however, 

downside risks also exist in these MSAs, as described in 

the following quote: 

Those regional economies with large and thriving 

high-tech industries are thus the regional economies 

that are reaping the largest gains in income and 

4 U.S. Bureau of Labor Statistics. 

Marcos 

Source: Bureau of Labor Statistics (Haver Analytics) 

wealth. Colorado, California, Massachusetts, Minnesota, Texas, Utah and Washington are the prototypical new regional economies...[however] the 

high-flying new regional economies may ultimately 

price themselves out of the new economy—witness 

...the spiking house price gains in the Bay Area of 

California or in New York... 5 

In addition, a U.S. Department of Housing and Urban 

Development report entitled “State of the Cities 2000” 

found that while the technology-driven expansion has 

raised wages, the resulting booming economy has also 

caused home prices to rise at twice the rate of inflation 

over the 1997–1999 period.6 

In addition to demographic and employment trends, 

housing demand is also heavily influenced by household income patterns, which have implications for the 

quantity and quality of housing that households can 

afford. Two sources of data are indicative of households’ ability to afford housing: per capita personal 

income and median family income. Once again, all four 

MSAs exhibited more rapid rates of per capita personal 

and median family income growth than the national 

averages (see Chart 4, next page). The demand for housing during the past decade clearly has been influenced 

by the strong gains in income. 

5 Zandi, Mark. July 19, 2000. Judging Regional Economies. 

RFA/Economy.com, http://dismal.com/thoughts/th_mz_071900.asp. 6 “State of the Cities 2000,” p. viii, U.S. Department of Housing and 

Urban Development, http://www.huduser.org/publications/pdf/socrpt. 

pdf. 

Dallas Regional Outlook 5 Fourth Quarter 2000 
Regional Perspectives
 

CHART 4 CHART 5 

Note: Data for Boulder–Longmont begin in 1984. 

Source: Census Bureau 

Despite Strong Housing Construction Activity, 

the Number of Building Permits 

Remains Below That of the Early 1980s 

Total Permits per 1,000 Residents

’80 ’82 ’84 ’86 ’88 ’90 ’92 ’94 ’96 ’98 

Austin–San Marcos 

Boulder–Longmont 

Denver 

Colorado Springs 

0 

5 

10 

15 

20 

25 

30 

35 

40 

45 

All Four MSAs Exceeded the United States in 

Per Capita and Median Family Income Growth 

between 1988 and 1998 

Median Family 

Per Capita Personal Income 

100 

90 

80 

56% 60% 

77% 

86% 87% 

45% 

69% 

85% 

56% 

93% Income 

Percent70 

60 

50 

40 

30 

20 

10 

0 

United Colorado Denver Austin–San Boulder– 

States Springs Marcos Longmont 

Sources: Census Bureau; Bureau of Economic Analysis (Haver Analytics); 

U.S. Department of Housing and Urban Development 

Factors Influencing Housing Supply 

New residential construction, reflected by building permits issued, is cyclical in nature, and is generally correlated with underlying economic conditions in each 

MSA. Although building permits are not a perfect indicator of additions to the housing stock, they are a good 

indicator of changes in housing supply. 

The strong expansion in residential homebuilding in the 

1990s (particularly in recent years) is prompting concerns about overbuilding in these markets, drawing comparisons with the real estate crisis of the mid-1980s. 

However, residential building permit data do not support 

this argument. Chart 5 shows the trend in residential 

building permits per 1,000 residents for the four MSAs 

during the past two decades. Even though total permits 

CHART 6 

at the close of the decade were above the lows of the late 

1980s and early 1990s, the number remains far below 

the overbuilt highs of the early 1980s, which were one 

contributing factor to the real estate crisis of the 1990s. 

Housing Affordability Decreases as Housing 

Costs Outpace Median Family Income 

Housing costs in these four MSAs have outpaced gains 

in median family income (see Chart 6). Consequently, 

affordability has suffered in these areas, particularly in 

recent years. The Housing Opportunity Index compiled 

by the National Association of Homebuilders (see 

Table 2, next page) shows the four MSAs ranked 

between 123rd and 134th in housing affordability out of 

173 MSAs7 surveyed in second quarter 2000. Families 

Housing Prices Rose Dramatically during the 1990s, Outpacing Gains in Median Family Income 

Home Prices 

140 

85% 

48% 

118% 

85% 

68% 

Median Family 

Income 107% 

78% 77%

Percent Increase,

1Q90 to 1Q00

120 

100 

80 

60 

40 

20 

0 

Austin– Boulder– Colorado Denver 

San Marcos Longmont Springs 

Sources: Freddie Mac Conventional Mortgage Home Price Index; RFA/Economy.com Median Family Income Figures; U.S. Department of Housing and Urban Development 

7 The MSAs were ranked from most affordable (1) to least affordable (173). 

Dallas Regional Outlook 6 Fourth Quarter 2000 
Regional Perspectives
 

earning the median income in these MSAs could afford 

only slightly more than half of all homes available for 

sale, well below the percentage for other U.S. families.8 

The acceleration of housing prices in recent years has 

been also the result of spiraling costs for land and 

building materials and the growing scarcity of skilled 

construction workers. Complicated and lengthy 

development procedures (e.g., delays in the permitting 

process, local government regulations, zoning, inspections, etc.), in addition to rising fees and building 

restrictions, are also driving up construction costs. The 

economic boom of the 1990s, which has contributed to 

the high cost of housing, is pushing residents to the 

fringes of these four MSAs, resulting in urban sprawl 

and exacerbating traffic congestion. 

Despite several years of strong gains in homebuilding 

activity, all four MSAs continue to experience strong 

housing demand in excess of supply, causing an 

increase in housing prices that has accelerated in recent 

years. We now examine more closely what factors have 

contributed to the escalation in housing prices in each of 

these MSAs. 

Austin–San Marcos MSA 

A thriving economy caused largely by an expanding 

high-tech industry and influx of new residents (approximately 2,000 each month) is contributing to a hot housTABLE 2 

ing market. Employment growth during the 1990s 

helped absorb much of the excess supply of housing 

from the 1980s. The tremendous run-up in stock prices 

and the addition of many high-paying jobs in the second 

half of the 1990s have contributed mightily to the rapid 

appreciation of new and existing homes, particularly 

expensive homes for the nouveau riche. 

Home prices have risen faster in the past two years. The 

median price of a new home in Austin–San Marcos rose 

7.3 percent in 1999, to $126,500. However, by June 

2000, the median price was $151,100, an increase of 

18.2 percent from a year earlier. As recently as May 

1997, Austin–San Marcos had more than 6,000 homes 

listed for sale, or a 6.8-month supply. In February 2000, 

however, there were slightly fewer than 3,000 active listings, or a two-month supply.9 The average single-family 

home in the MSA is on the market only 30 to 35 days 

before it is sold. 

At the same time, residential building permits in the 

Austin–San Marcos MSA (January through July 2000) 

registered double-digit gains in both single-family and 

multifamily permits, and are on pace to surpass last 

year’s peak in homebuilding activity during this expansion. Yet the inventory of new and existing homes 

remains very low because strong job growth and rapid 

net in-migration have homebuilders struggling to keep 

up. The results are rising home prices and lengthening 

homebuilding schedules. 

Four Dallas Region MSAs Are Among the Least 

Affordable Housing Markets in the Nation 

HOI* 2000 


Q2 SHARE OF
 

HOMES
 2000 2000 Q2 

AFFORDABLE MEDIAN FAMILY 2000 Q2 AFFORDABILITY 

FOR MEDIAN INCOME MEDIAN SALES RANK 

METRO AREA INCOME (000S) PRICE (000S) NATIONAL 

AUSTIN–SAN MARCOS 54.0 58.9 155 123 

BOULDER–LONGMONT 50.9 74.0 216 132 

COLORADO SPRINGS 50.0 51.3 152 134 

DENVER 51.3 62.1 180 131 

UNITED STATES 58.4 50.2 147 NA 

* The Housing Opportunity Index (HOI) is based on the median family income, interest rates, and the price distributions of homes sold in each market in second quarter 2000. A total of 173 metropolitan areas were ranked. 

Sources: National Association of Home Builders; First American Real Estate Solutions; U.S. Department of Housing 

and Urban Development 

8 Housing Opportunity Index: Second Quarter 2000, National Association of Home Builders, http://www.nahb.com/facts/hoi/2000_2q/
 

regional_alpha.htm.
 

9 Texas A&M Real Estate Center, http://recenter.tamu.edu/data/.
 

Dallas Regional Outlook 7 Fourth Quarter 2000 
Regional Perspectives
 

Denver MSA 

Denver MSA job growth remains robust, expanding at a 

rate of 3.3 percent for the 12-month period ending June 

2000.10 Job and population growth is outpacing housing 

production, driving housing costs upward. The price of 

a single-family home in Denver appreciated an average 

of 12.1 percent in 1999. The average 

price of an existing single-family 

home in the Denver MSA rose to a 

record $250,000 in August 2000, up 

19.3 percent from a year earlier.11 

Meanwhile, the median price— 

believed to be a better measure of affordability—broke 

the $200,000 barrier for the first time. Homes priced 

under $200,000 are increasingly hard to find. Resales 

are spending an average of 38 days on the market in 

2000, compared with a 44-day average in 1999. Permits 

for new, single-family homes for the first seven months 

of 2000 dropped 13.4 percent from the same period a 

year ago.12 Demand for housing is strong, and builders 

are unable to replenish the existing stock at a rate that is 

commensurate with demand. 

Boulder–Longmont MSA 

Employment figures for Boulder–Longmont reveal a 3 

percent growth rate through the first seven months of 

2000. The MSA’s unemployment rate of 2.6 percent in 

July 2000 was well below the national rate,13 requiring a 

steady influx of in-migrants to sustain its strong employment growth. However, strong employment conditions, 

coupled with rising land and housing costs, are eroding 

the cost advantage that local residents enjoyed at the 

beginning of the 1990s. According to the Federal 

Home Loan Mortgage Corporation’s (FHLMC) 

repeat-purchase house price index, the price of existing 

homes in Boulder–Longmont increased more than 15 

percent in second quarter 2000 from a year ago.14 

Robust economic growth is creating a strong demand 

for housing. This demand, in addition to the current 

shortfall in supply, is causing home prices to soar. 

Severe growth pressures (e.g., traffic congestion, 

demands on the infrastructure) are mobilizing the public to demand that local governments restrict further 

development. Tight labor markets, the shortage of 

affordable housing, and mounting antigrowth sentiment 

may limit expansion and constrain future growth. 

Colorado Springs MSA 

High-tech manufacturing, national defense, tourism, 

and a large cadre of military retirees drive the Colorado 

Springs economy. This MSA is experiencing moderate 

job growth (3.2 percent, January through July 2000),15 

very low levels of unemployment, relatively strong inmigration, and rapid income growth. In recent years, 

Colorado Springs has attracted a large number of businesses because its cost of doing business is lower than 

the neighboring Denver and Boulder–Longmont MSAs. 

A study conducted by Coldwell Banker ranked it as the 

most affordable housing market in Colorado.16 Nonetheless, growth pressures, such as urban sprawl and congestion, are emerging problems. 

According to the Colorado Legislative Council, an advisory council to the state legislature, Colorado Springs 

continues to enjoy a “sustained real estate boom.”17 

According to the FHLMC repeat-purchase house price 

index, the price of existing homes in Colorado Springs 

increased 7.4 percent during second quarter 2000 from a 

year ago.18 However, home prices have not accelerated as 

rapidly in Colorado Springs as they have in neighboring 

Denver and Boulder–Longmont. One reason may be that 

although employment growth has been strong in all three 

MSAs, median family income has not grown as rapidly 

in Colorado Springs. 

10 Colorado Department of Labor and Employment, http://lmi.
 

cdle.state.co.us/ali/00dnvrws.htm.
 

11 Denver Board of REALTORS and Denver Metropolitan Commercial Association of REALTORS.
 

12 U.S. Census Bureau, http://www.census.gov/const/C40/Table3/
 

t3yu0007.txt.
 

13 Colorado Department of Labor and Employment, http://lmi.cdle.
 

state.co.us/ali/00bldrws.htm.
 

14 Federal Home Loan Mortgage Corporation, http://www.
 

freddiemac.com/finance/cmhpi/current/excel/msas.xls.
 

15 Colorado Department of Labor and Employment, http://lmi.cdle.
 

state.co.us/ali/00spgsws.htm.
 

16 The 2000 Coldwell Banker Home Price Comparison Index is based
 

on a single-family dwelling model with approximately 2,200 sq. ft., 4
 

bedrooms, 21/2 baths, family room (or equivalent), and 2-car garage.
 

Surveyed homes and neighborhoods are typical for corporate middle-


management transferees. http://www.coldwellbanker.com/FRAMES/
 

TopFrame.asp?Item=hpci.
 

17 Colorado Legislative Council. “Colorado Economic Chronicle”
 

August 2000, p. 4, http://www.state.co.us/gov_dir/leg_dir/lcs/
 

chronicle/2000/Aug00/cr0800.PDF.
 

18 Federal Home Loan Mortgage Corporation, http://www.
 

freddiemac.com/finance/cmhpi/current/excel/msas.xls.
 

Dallas Regional Outlook 8 Fourth Quarter 2000 
Regional Perspectives
 

Summary 

Housing construction activity in the Dallas Region likely will remain strong into 2001, although off slightly 

from its 1999 peak. The decline since 1999 can be 

attributed to a softening in demand for homes, albeit 

from already high levels; comparatively higher mortgage rates; and weaker growth in capital gains. One of 

the most significant downsides to the Region’s booming 

economy is that, at this stage of the cycle, incomes are 

failing to keep up with escalating housing prices. 

Several supply constraints have contributed to this growing gap between income and housing prices. Lack of 

skilled construction labor, a shortage of developable lots, 

and increasing antigrowth sentiment are major impediments to new home construction. The tight housing market is putting a squeeze on potential homebuyers and 

renters as they face rising home prices and rents resulting from the limited supply of housing. This trend is 

making it more difficult for employers to attract entryand mid-level workers. Housing availability is a key factor in the continued economic strength of these MSAs. 

Throughout the 1990s, housing production in these 

MSAs has played catch-up, with demand for housing 

stimulated largely by strong job growth. Economic theory suggests that when housing grows scarce and less 

affordable, households will respond by deferring homeownership, by “doubling and tripling up” occupancy, or 

by commuting longer distances from where housing 

may be more affordable. Short of an economic slowdown in these areas, demand for housing is likely to 

remain strong, with home prices continuing to rise 

rapidly. Unless mortgage interest rates, which have 

come down 50 basis points since peaking at 8.52 percent in May 2000 (monthly average),19 start to climb 

again, healthy employment conditions and favorable 

consumer attitudes will continue to generate robust 

housing demand. In the long term, the Austin–San Marcos, Boulder–Longmont, Colorado Springs, and Denver 

MSAs must try to balance continued strong economic 

growth with intensifying antigrowth sentiment. 

19 FHLMC, Federal Reserve Board (Haver Analytics). 

Dallas Region Insured Institutions Continue to “Loan Up”
 

Insured financial institutions in the Dallas Region have 

increased their relative lending volume to the highest 

level in the past 14 years. This loan growth has risen 

rapidly over the most recent 21

/2-year period. The 

Region’s insured institutions reported a loan-to-asset 

(LTA) ratio as low as 43.1 percent for year-end 1990,20 

compared with 60.2 percent as of June 30, 2000. This 

section examines what factors have contributed to the 

increase in loan levels, looks at insured institutions 

experiencing the most rapid rate of loan growth, and 

considers the implications for banks and thrifts from 

these shifts in asset composition. Emerging risks 

include the potential for increasing levels of credit risk, 

expanding loan exposure at a time when the economy 

could be slowing, and an allowance for loan and lease 

losses (ALLL) that has lagged the Region’s rapid level 

of loan growth and that is already the lowest among all 

FDIC Regions. 

Factors contributing to why Dallas Region banks and 

thrifts have increased loan levels include relatively low 

20 Excludes NationsBank—Texas, which consolidated with NationsBank in June 1998. 

LTA levels and a strong demand for loans generated by 

the robust Dallas Region economy. A discussion of the 

recent trend in loan growth is not complete, however, 

without a look back at why the Region’s insured institutions have held a greater proportion of securities than 

loans since the late 1980s. 

Background 

Dallas Region insured institutions have placed greater 

emphasis on securities than have banks and thrifts elsewhere in the country since the banking crisis of the late 

1980s and early 1990s. Reasons may stem from the 

memories of large credit losses of the 1980s,21 favorable 

funding sources,22 or both. In any case, Dallas Region 

insured institutions have performed well compared with 

banks and thrifts elsewhere in the country despite this 

difference in asset allocation. 

21 See Regional Outlook, fourth quarter 1999, pp. 24–25. 22 See Regional Outlook, second quarter 2000, p. 9. 

Dallas Regional Outlook 9 Fourth Quarter 2000 
Regional Perspectives
 

The Dallas Region’s ability to hold a high percentage of 

securities and maintain profitability was helped by a 

favorable interest rate environment. However, the shape 

of the yield curve from 1997 through 1998 provided 

incentives for insured institutions to extend maturity 

distributions in order to attain higher yields. For example, mortgage-backed securities (MBS) with maturities 

in excess of 15 years held by the Region’s insured institutions stood at 63 percent of total MBS as of year-end 

1999, up from 40 percent two years prior. In comparison, 48 percent of MBS portfolios nationwide were held 

in long-term securities, up from 33 percent over the 

same period. This strategy was successful while interest 

rates were steady; however, the extended maturity distribution also elevated the potential for greater interest 

rate and market risk. 

In fact, beginning June 30, 1999, the Federal Reserve 

began raising short-term interest rates at the same time 

the U.S. Treasury was buying back longer-term bonds.23 

The net effect was generally rising interest rates and a 

yield curve that inverted at the three-month mark. 

Banks holding large MBS portfolios with extended 

maturities saw the value of these securities begin to fall, 

and the overall yield was sub par, particularly compared 

with loans.24 

TABLE 3 

The Region’s Banks and Thrifts Have Increased 

Loan Levels 

In an environment in which loan demand was strong 

and a strategy of holding a large share of securities was 

less effective because of rising interest rates, many 

insured institutions began increasing loan levels to 

maintain profitability. Historically, loans have returned 

higher yields than securities. As shown in Table 3, assets 

held by Dallas Region insured institutions25 grew 22 

percent between year-end 1997 and June 30, 2000, a 

slightly higher rate than for the nation. At the same 

time, loan volume increased 33 percent for the Region, 

compared with 23 percent for the nation. While the percentage of assets dedicated to loans increased for both 

the Region and the nation, the Region’s loan portfolio 

has grown more rapidly. 

Moreover, the types of loans showing the greatest 

increases include real estate construction (95 percent), 

commercial real estate (54 percent), and commercial and 

industrial (33 percent), all of which historically exhibit 

higher levels of risk than many other loan categories. 

In addition to the shift into traditionally higher-risk 

assets, Table 3 shows the difference between insured 

institutions headquartered in metropolitan and rural 

areas. In general, insured institutions’ loan portfolios in 

metro areas grew more rapidly than did portfolios of 

Loan Growth Shows Rapid Shift to Historically More Risky 

Loans among Insured Institutions (year-end 1997 to June 30, 2000) 

UNITED STATES DALLAS REGION 

ALL ALL 

INSTITUTIONS INSTITUTIONS METRO RURAL 

(%) (%) (%) (%) 

TOTAL ASSETS 18.6 22.4 25.0 10.8 

TOTAL LOANS 22.6 33.4 35.6 22.6 

RE CONSTRUCTION 68.2 94.7 97.4 73.3 

COMMERCIAL RE 29.4 53.5 56.1 42.0 

CONSUMER 3.6 17.6 19.3 8.0 

C&I 31.4 32.9 34.0 25.2 

SINGLE-FAMILY AND 19.4 23.1 23.0 23.4 

1 TO 4 RESIDENTIAL 

RE = real estate; C&I = commercial and industrial 

Source: Bank and Thrift Call Reports 

23 Ibid.
 

24 Ibid. Chart 7 shows how a rising interest rate environment affected securities available for sale.
 

25 For insured institutions in the Dallas Region as of June 30, 2000, merger adjusted.
 

Dallas Regional Outlook 10 Fourth Quarter 2000 
Regional Perspectives
 

rural-based institutions for all types of loans except CHART 7 

single-family and 1- to 4-family residential loans. Par- Dallas Region Institutions Continue to “Loan Up” ticularly noteworthy is the fact that insured institutions 

in metropolitan areas grew real estate construction 

loans 24 percentage points faster than did those in rural 

areas. Metro-based institutions also increased commercial real estate and consumer loans more rapidly than 

did rural-based institutions. 

Dallas Region insured institutions were able to increase 

loan levels in part because they were less “loaned up” 

than institutions elsewhere in the country. They were 

therefore able to grow loan portfolios without the heavy 

Loans/Assets (percent)

United States 

2.71 Difference 

5.43 Difference 

Dallas Region Less 

NationsBank—Texas 

55 

56 

57 

58 

59 

60 

61 

62 

63 

use of noncore funds experienced elsewhere. In fact, Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun 

deposits fell slightly for the four quarters ending June 

30, 2000, and other borrowed funds increased by only 2 

percentage points (as a percentage of total assets). 

The net result is that the LTA ratio for the Region’s 

insured institutions is increasing faster than that of the 

nation, and the historical gap between the LTA ratio for 

the Region and the nation is narrowing (see Chart 7). 

Dallas Region’s Robust Economic 

Expansion Fuels Loan Growth 

A strong regional economy also contributed to the 

increased loan volume among the Region’s banks and 

thrifts. The Region has outpaced the nation in gross output, employment, and population growth. The gross 

regional product growth from 1997 through 1999 averaged 6.1 percent,26 compared with the nation’s 4.3 percent gross domestic product growth. The Region’s 

average employment growth rate was 3.4 percent, outpacing the U.S. average of 2.5 percent. The Region 

reported a 1.6 percent population growth, compared 

with the U.S. average of 0.9 percent. These indicators 

illustrate the Region’s economic vibrancy, which likely 

translates into an increased demand for loans. 

Institutions with High Levels of 

Loan Growth Show Distinct Trends 

To compare their vulnerability with that of other institutions, we analyzed banks and thrifts with assets less 

than $1 billion that experienced the greatest increases in 

loan volume from December 31, 1997, through June 30, 

26 Average growth rate is an average of growth rates for 1997, 1998, 

and 1999. 

’97 ’98 ’98 ’98 ’98 ’99 ’99 ’99 ’99 ’00 ’00 

Source: Bank and Thrift Call Reports 

2000. Interest rates began to rise during this period, and 

the securities component of the asset portfolio continued to decline to a level closer to the U.S. average. After 

adjusting for mergers and acquisitions and removing de 

novo institutions,27 we ranked the institutions by loan 

growth rate. We then examined the insured institutions 

in the top 25 percent and compared their characteristics 

with those of other banks and thrifts in the Region and 

the nation. 

The 324 banks and thrifts28 in the top 25 percent exhibit 

very distinct trends. Changes after June 30, 1999—when 

short-term interest rates began their 175-basis-point 

climb—are particularly enlightening. This group’s loan 

volume grew much faster (31.9 percent for the four quarters ending June 30, 2000, compared with 10.6 percent 

for other institutions in the Dallas Region29 and 11.2 percent for institutions nationwide). Of particular interest is 

the increase in real estate construction loans (46 percent), commercial real estate loans (39 percent), and 

commercial and industrial loans (32 percent), categories 

that have been historically more risky. The shift into 

loans and traditionally higher-risk loan categories has 

contributed to an increase in the group’s net interest margin. In contrast, insured institutions in the nation have 

experienced margin compression (see Table 4, next 

page). However, the ALLL-to-total-loans ratio declined 

to 1.11 percent for the institutions exhibiting the most 

27 Banks established after December 31, 1997, are not included for
 

two reasons. First, de novo institutions tend to exhibit rapid loan
 

growth, which may distort the analysis. Second, these institutions did
 

not report loans or assets prior to year-end 1997.
 

28 Combined assets of $48 billion.
 

29 Less than $1 billion in assets.
 

Dallas Regional Outlook 11 Fourth Quarter 2000 
Regional Perspectives
 

rapid loan growth rates, significantly lower than the ratio 

for either the Region or the nation. 

The results of our analysis reflect the trends relating to 

institutions doing business in metro and rural areas. 

Banks and thrifts in the high-loan-growth group tended 

to be in the Region’s metro areas, and these institutions 

increased lending significantly faster than did institutions in rural areas—35 percent for metro versus 26 

percent for rural. As shown in Table 4, the metro highloan-growth group also holds a higher percentage of 

loans and the highest net interest margin of all institutions in the Region or nation as of June 30, 2000. 

Banks and thrifts with a significant allocation30 of commercial and industrial loans were by far the largest subgroup within this high-loan-growth group, representing 

almost 60 percent of all insured institutions in the 

analysis. 

Implications of a Significant 

Shift in Asset Composition 

Previously, banks and thrifts were willing to accept 

interest rate and market rate risk because the interest 

rate environment was stable and funding costs were low. 

As interest rates increased and (realized and unrealized) 

securities losses mounted, insured institutions began 

TABLE 4 

shifting asset composition away from securities and into 

loans, a shift that could increase the level of credit risk. 

As a result, the loan review and credit administration 

functions have become increasingly important. 

Expanding Loan Volumes May Become 

Risky if the Economy Slows 

The Dallas Region has benefited from extraordinary 

economic growth. The demand for lending also has 

increased, providing an incentive for banks and thrifts to 

make loans despite intense competition from bank and 

nonbank sources. Should the economy slow, however, 

competition for the best credits may increase as demand 

falls overall. David Stumpf, an analyst with A.G. 

Edwards, wrote, “A sluggish economy not only would 

diminish loan demand, but also could put additional 

pressure on credit quality.”31 In addition, the Region’s 

rising share of loans has implications for the ALLL. 

The ALLL Has Not Kept Pace with Loan Levels 

Charge-offs and past-due rates are at historically low 

levels for the nation and the Region. However, a lesson 

from past economic downturns is that today’s loans 

could become tomorrow’s problems. 

Institutions Experiencing High Loan Growth 

Maintain Net Interest Margin and Return on Assets 

LOAN-TO-ASSET NET INTEREST RETURN ON ALLL-TORATIO MARGIN1 ASSET1 TOTAL LOANS 

HIGH-LOAN-GROWTH 

GROUP 

HIGH LOAN—METRO 

HIGH LOAN—RURAL 

JUN-99 JUN-00 JUN-99 JUN-00 JUN-99 JUN-00 JUN-99 JUN-00 

59 

60 

58 

64 

65 

62 

4.68 

4.79 

4.48 

4.85 

4.94 

4.68 

1.17 

1.16 

1.18 

1.18 

1.19 

1.15 

1.13 

1.15 

1.10 

1.11 

1.14 

1.07 

DALLAS REGION2 

UNITED STATES 

52 

61 

55 

63 

4.46 

3.88 

4.66 

3.82 

1.24 

1.24 

1.32 

1.14 

1.35 

1.60 

1.31 

1.53 

1Income statement ratios are for the six-month periods ending June 30, 1999, and June 30, 2000, annualized. 

2Includes all Dallas Region institutions except (a) those with more than $1 billion in assets and (b) those in the 

high-loan-growth group. 

ALLL = allowance for loan and lease losses 

Source: Bank and Thrift Call Reports 

30 Significant allocation is defined as institutions with more than 25 percent of total loans in the following categories: commercial and industrial,
 

real estate construction, multifamily, and commercial real estate lending.
 

31 Stumpf, David. September 11, 2000. Credit Concerns Succeed Rate Fears on Wall Street. American Banker, p. 32.
 

Dallas Regional Outlook 12 Fourth Quarter 2000 
Regional Perspectives
 

The Dallas Region is indeed “loaning up.” The 324 

banks and thrifts in our analysis are increasing loan 

exposure at twice the rate of other institutions in the 

Region and the nation. However, insured institutions in 

the Dallas Region continue to report the lowest ALLLto-total-loans ratio of any FDIC Region. Moreover, the 

Region’s fastest-growing banks and thrifts report an 

ALLL ratio that has been declining and is lower than 

that of other insured institutions in the Region. Should 

the economy weaken and loans begin to deteriorate, 

many institutions may find themselves without adequate buffers against future losses. 

Dallas Region Staff 

Dallas Regional Outlook 13 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 

Dallas Regional Outlook 14	 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 

Dallas Regional Outlook 15	 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

Dallas Regional Outlook 16 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. 

Dallas Regional Outlook 17 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 

Dallas Regional Outlook 18 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. 

Dallas Regional Outlook 19 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. 

Dallas Regional Outlook 20 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. 

Dallas Regional Outlook 21 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. 

Dallas Regional Outlook 22 Fourth Quarter 2000 
✁
 

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