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The U.S. economy is now in its sixth year of expansion. Pronounced weakness in the housing sector is being largely offset by continued strength in the corporate sector, commercial construction activity, and exports. Meanwhile, FDIC-insured institutions continue to ride a string of six consecutive years of record earnings. Bank capital levels remain at historic highs, while loan performance has slipped only slightly from record levels. Only one FDIC-insured financial institution has failed over the last two and a half years.
Still, some negative trends have emerged for banks. They include a narrowing of net interest margins, particularly among larger institutions; increasing concentrations of traditionally riskier commercial real estate loans; and emerging signs of credit distress in subprime mortgage portfolios. Ultimately, it is local economic conditions that are the most important determinants of credit quality and earnings strength at the majority of banks and thrifts. In this issue of the FDIC Outlook, our regional analysts identify trends that are expected to affect banking in their areas during the remainder of 2007.
Atlanta Region: The residential real estate sector has contributed greatly to the recent economic expansion in the Region, particularly in metropolitan areas. However, continued weakening in the housing sector could moderate demand for real estate construction loans and slow revenue growth from lending activities.
Chicago Region: The Region’s automobile manufacturing industry continues to face an uphill climb, pressuring employment growth, housing markets, and the overall performance of FDIC-insured institutions in the Region. Analysts consider the potential for strength in other sectors, most notably the services sector, to mitigate the ongoing problems in manufacturing.
Dallas Region: Unlike other areas of the country, the energy and housing sectors have been key drivers of recent economic growth in the Southwest. Although the overall pace of economic growth across the Mid-South has been favorable, much of this growth has occurred in urban areas. Key differences in economic activity exist between rural and urban counties and have implications for the local banking industry.
Kansas City Region: The unique rural and agricultural nature of this Region heightens its vulnerability to ongoing rural depopulation trends, dependence on agricultural subsidies, and continuing drought.
New York Region: Weakness in the housing sector is of particular importance due to the relatively large share of residential mortgage lenders in the Mid-Atlantic and New England areas. Analysts in these areas assess the potential for strength in other economic sectors to mitigate the negative effects of a housing sector downturn.
San Francisco Region: The construction sector has driven much of the Region’s recent economic expansion and has contributed to high and increasing concentrations of commercial real estate and construction loans. Should the housing sector continue to weaken, the effects of a slowing in the construction industry could ripple through local economies.
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