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Camera-ready art of "Regional Outlook" (263Kb PDF file - PDF help or hard copy)
In Focus This Quarter
Economic Conditions and Emerging Risks in Banking--This article provides an overview of economic conditions and banking industry trends, with a primary focus on potential risks to insured depository institutions.
Indicators of Industry Performance--The reported financial condition of insured banks and thrifts is strong. However, despite projected growth in earnings, bank and thrift stocks underperformed the broader market through October 1999.
Economic Conditions--The economy remains generally strong, and the outlook calls for continued growth. Growth is likely to slow, however, in order to correct financial imbalances that have developed as a result of a rapid creation of household and commercial credit and borrowing from abroad. There is a threat that the adjustment process could be a volatile one.
Emerging Risks in Banking--Rising indebtedness on the part of businesses and households raises concerns about future loan performance. Industry responses to intense competition have created greater credit, market, and operational risks.
Consumer Lending--Banks and thrifts are becoming increasingly involved in subprime consumer lending, which has raised some supervisory concerns.
Commercial and Industrial Lending--Signs of deterioration in corporate credit quality can be found in rising loss rates, slower profit growth, and rising corporate bond defaults. At the same time, banks are expanding their lending to heavily indebted companies in the syndicated loan market.
Commercial Real Estate and Construction Lending--Loans for real estate construction and development are growing rapidly. Despite an uptick in commercial vacancy rates, loan losses remain low.
Agricultural Lending--Low commodity prices are hurting farm operating incomes, but widespread effects on farm banks have yet to materialize.
Funding and Interest Rate Risk--Lagging deposit growth has led to a greater reliance on more volatile, market-based funding, and some institutions are taking on greater interest rate risk to maintain loan growth.
By the Analysis Branch Staff
Regional Perspectives
Economic and Banking Conditions--The Dallas Region's economy continued to moderate from very robust levels in the mid-1990s to a more sustainable 2 to 3 percent growth in the past year. Housing demand, although fairly strong, is expected to taper off in 2000. The Region's financial institutions are reporting healthy conditions; however, Oklahoma agricultural banks are showing signs of stress as evidenced by relatively high past-due levels.
Number of Institutions Electing S Corporation Status Is Increasing--The number of financial institutions in the Region electing S corporation tax status increased dramatically; the Region now accounts for about one-quarter of all S corporation banks nationwide. Because of the effect of this tax-advantaged status on profitability measures, the conversion of a significant number of small institutions to Sub S status makes performance comparisons over time more difficult and may mask earnings deterioration in non-Sub S banks.
Lengthening MBS Maturities Could Expose Institutions to Higher Levels of Interest Rate and Market Risks--Mortgage-backed securities represented over half the Region's total securities portfolio as of June 30, 1999, and have significantly longer maturities than the national average. While the unique asset mix of the Region's financial institutions may result in lower levels of credit risk, holding a greater percentage of securities may also expose many institutions to higher levels of interest rate and market risk.
By the Dallas Region Staff
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