Robust Job Growth in 1998, but at a Slower Pace than in 1997
Although the San Francisco Region experienced a significant slowdown in the manufacturing sector during 1998, it continued to outperform the nation in overall job growth (see Chart 1). In the 12 months ending December 1998, the Region added jobs at a seasonally adjusted 3.0 percent ratewell above the nation's 2.3 percent rate. The Region's economic performance reflects strength in a number of industrial sectors, as can be seen in Chart 2. The construction, services, financial services, and transportation and public utilities sectors all reported 3.0 percent or more growth in 1998, following strong growth in 1997. Weakness in global markets appears to have stopped the rapid growth in manufacturing jobs and led to a decline in mining employment. Most important, weakening exports and surging imports appear to have resulted in a 0.3 percent loss in durable goods manufacturing jobs in 1998, a sharp contrast with the 5.9 percent increase in 1997.
Despite its overall strength, performance varied widely across the Region in 1998. Although a number of areas with large dependence on high-technology manufacturing reported weakness, three states remained among the nation's fastest at adding jobs. Nevada (ranked second), Arizona (third), and California (sixth) added jobs at annual rates of 3.3 percent or better in 1998, significantly outperforming the nation in job growth (see Chart 3, next page). Strong job growth contributed to strong personal income growth and declining unemployment in the Region.
In 1998, six states in the Region added jobs at a rate similar to the nation's 2.3 percent increase:Utah (2.7 percent), Idaho (2.6 percent), Washington (2.4 percent), Alaska (2.1 percent), Montana (1.9 percent), and Oregon (1.9 percent). Utah and Oregon had experienced rapid high-tech job growth prior to 1998, when both were among the fastest-growing states in the Region. Despite weakness in the energy sector, caused by the significant reduction in oil prices in 1998, Alaska's job growth rate was nearly as fast as the nation's. Montana's job growth held steady in 1998; increases in services and financial sector jobs were offset by declines in mining and construction jobs.
Wyoming and Hawaii, however, continue to lag well behind both the Region and the nation in economic performance. Wyoming's job growth rate fell from 2.5 percent in 1997 to 0.4 percent in 1998, ranking it forty-eighth in the nation. Low energy prices in 1998 were reflected in job losses in the state's key mining sector. Most other sectors of the economy, except for financial services and the service sector, reported slow job growth. Hawaii, which remained mired in a recession during 1998, was one of only two states in the nation to lose jobs. Hawaii continued to report widespread weakness across most sectors of its economy. It also continues to be hurt by softness in Japanese tourism and reduced spending by visitors.
Most Insured Financial Institutions Reported Solid Profits for 1998
The Asian crisis, which was primarily responsible for losses in the Region's manufacturing jobs, did not materially affect the 1998 performance of most insured financial institutions. Commercial banks and savings institutions without direct international exposure, as well as credit card specialty banks,1 benefited from the Region's strong economy and reported solid profits. The Region's generally strong economic performance over the year is also reflected in the strong asset quality reported by financial institutions. The 1.82 percent past-due loan ratio posted for year-end 1998 is the lowest in the decade for the Region. Furthermore, 41 new banks opened for business during 1998. The industrywide trend toward consolidation continued, as 58 of the Region's institutions were eliminated through mergers and acquisitions. The Region's first bank failure in over a year occurred during 1998.
1 A credit card specialty bank is an institution with credit card loans and secured receivables outstanding greater than 50 percent of its total loans, and total loans greater than 50 percent of total assets.
For certain banking companies with international, subprime, and agricultural exposures, 1998 was not so kind. For example, the primary reason the Region's aggregate return on average assets (ROA) declined from the 1.19 percent reported for 1997 to 1.07 percent for 1998 was the problems experienced by a few large commercial banks with significant international exposure. Another illustration of the negative spillover effects of international problems is the poor relative performance of Hawaii's community banks.2 These banks reported an ROA of only 0.22 percent and a high 5.12 percent past-due loan ratio because of Hawaii's continuing recession, which has correlated with Japan's prolonged recession. In addition, the Region's subprime lending specialists saw their ROA drop from 1.09 percent in 1997 to 0.59 percent in 1998, when larger subprime lenders had problems profitably securing loans during the third and fourth quarters because of capital market turbulence. Finally, while Montana's agricultural banks3 continue to report strong profits, their aggregate past-due loan ratio increased from the 3.96 percent reported in 1997 to 4.52 percent as of December 1998. Several years of depressed commodity prices, particularly wheat prices, are beginning to erode asset quality at these smaller agricultural banks.
2 A community bank is a commercial bank with less than $1 billion in total assets, excluding specialty credit card banks. Also excluded are industrial loan companies and other special-purpose lenders common in the Salt Lake City and Phoenix MSAs.
3 An agricultural bank is an institution with agricultural loans greater than 25 percent of total loans.
A High-Tech Slowdown Has Hit the Region's Important Manufacturing Sector
The emerging story in the San Francisco Region's economy in 1998 was the sudden downturn in manufacturing, especially the high-tech sector. This trend is an important concern because both the Region as a whole and several metropolitan areas are heavily dependent on manufacturing and high-tech for both jobs and exports. The main driver of the observed weakness in manufacturing appears to be the Asian crisis (see Strong Economic Growth Is Expected to Continue in the San Francisco Region despite Potential Fallout from the Asian Crisis, Second Quarter 1998 Regional Outlook) and overcapacity in the high-tech sector. Weakness in the Asian economies that started in 1997 is reflected in both a slowdown in U.S. exports to Asia and the increased competitiveness of Asian products following 1997 currency devaluations. After economic struggles of the Asian Ten nations in the second half of 1997 and 1998, the Region's manufacturing sector reported significant downturns in 1998 in both exports and jobs.4 Moreover, the weakness has been even more pronounced in several states and MSAs in the Region that have especially large high-technology job clusters. At least in part because of expanding high-tech industries prior to 1998, several of these MSAs experienced rapid growth in their residential and commercial real estate (CRE) markets. Consequently, community bank exposure to construction and CRE lending has risen far above national averages in Portland, Salt Lake/Provo, Sacramento, and San Jose.
4 China, Hong Kong, Indonesia, Japan, Malaysia, the Philippines, Singapore, South Korea, Taiwan, and Thailand.
The Region's high-tech sector is important because of the number of jobs and the amount of income it generates. According to the latest Survey of Manufacturing (1996) by the Census Bureau, high-technology accounted for more than 438,000, or nearly 15 percent, of the Region's 3.0 million manufacturing jobs.5 Elsewhere in the nation, only 6 percent of manufacturing jobs were in these high-tech industries. Moreover, the survey showed that the Region accounted for more than 32 percent of the nation's computer manufacturing jobs and nearly 37 percent of the electronic component manufacturing jobs, despite accounting for about 18 percent of nonfarm payroll employment nationally. Finally, the high-tech sector is slowing at the same time that another key industry in the Region, aerospace, is contracting.
5 High-tech employment is defined here as jobs related to computers and office equipment, communication equipment, electronic components and accessories, and measuring and control devices.
The slowdown in high-technology is also significant since high-tech manufactured goods are the Region's leading export products. High-tech goods exported to Asia were the fastest-growing segment of the U.S. export market prior to 1997. As shown in Table 1, in 1997, half of the Region's $165 billion in exports were high-tech products, according to the International Trade Administration's (ITA) Exporter Location series. Elsewhere in the nation, high-tech accounts for only about 37 percent of exports. Within the Region, high-tech goods accounted for especially large shares of exports from Arizona (77 percent), Idaho (68 percent), and California (61 percent). Other states with high-tech clusters and export exposures include Oregon (39 percent) and Utah (32 percent). Furthermore, each of these states has one or more MSAs with high-tech clusters that are even more dependent on high-technology for both jobs and exports than the state is.
The Asian Crisis Hits Home
The Asian crisis also has exacerbated the high-technology sector's ongoing problems with worldwide overcapacity, especially in semiconductors, leading to layoffs, postponements, and cutbacks. Falling prices, typical for the industry but now also driven by the Asian currency devaluations of 1997, have added to a need on the part of domestic producers to control costs to remain competitive in both domestic and foreign markets. Moreover, the retrenching is taking place at the same time sub-$1,000 personal computers (PCs) that provide cheap access to the Internet have diverted sales from high-end producers, causing another shift within the industry.
The rapid expansion in the Region's high-tech manufacturing jobs came to a halt in 1998 as exports to Asia fell. First-quarter 1998 high-tech exports from the Region to the Asian Ten nations were down 12.3 percent from the same quarter in 1997. Total exports to these nations declined by 10.7 percent during the same period. Detailed high-tech employment figures for the Region are not available; however, combined data for California, Washington, and Oregon show the weakness. All three states reported losses in high-tech jobs. In 1998 high-tech jobs in these three states fell by a total of 11,200 jobs, after 24,000 jobs were added in 1997. For the Region as a whole, the slowdown in high-technology was most evident in the figures for durable goods manufacturing, the job category that includes most high-tech manufacturing jobs. Durable goods manufacturing jobs fell by 6,600 jobs (0.3 percent annual rate) in 1998, after posting a 112,600 job increase (5.9 percent increase) in 1997.
MSAs with High-Tech Clusters Face Higher Risks
The slowdown in high-technology is even more important at the state and metropolitan area levels because of the tendency for high-tech firms, both manufacturers and service providers, to cluster around high-tech centers to take advantage of efficiencies for both producers and employees. High-tech clusters provide access to suppliers along with the benefits of high-tech financing, local information, and technology spillovers that enhance productivity. Workers in these markets also benefit from a wider supply of high-tech employers, which increases job opportunities.6 Examples of MSAs with high-tech clusters, discussed in more detail later, include San Jose, Phoenix, Portland, Salt Lake City/Provo, and Sacramento.7 High-tech expansion during 1995 through 1997 benefited these clusters; however, the weakness in exports starting in the second half of 1997 has had a negative effect on the job growth rates in these MSAs during 1998.
6 High-tech firms typically include the availability of skilled pools of labor and proximity to universities in their location decisions, along with a favorable business environment, cost of living, and availability of transportation. Many high-tech start-ups choose to locate in an established high-tech center because of the availability of financing as well as the other advantages a high-tech cluster provides.
7 Each of these areas is home to a number of community banks. The Boise MSA, which also has a sizable high-tech cluster, was dropped from the analysis because only a few community banks are headquartered there.
MSAs with high-tech clusters may face a greater risk than those that are less dependent on high-technology, especially if a prolonged high-tech slowdown dampens exports and jobs in the industry. San Jose, Portland, Sacramento, and Boise all experienced rapid job growth in durable goods manufacturing in 1997, but they lost jobs in 1998 when high-tech began to weaken (see Chart 4). Other high-tech centers, namely Phoenix and Salt Lake/Provo, added jobs in durable goods manufacturing at a slow pace in 1998. Slowing in overall job growth also was more pronounced in the high-tech MSAs than in the remainder of the Region.
The slow or negative growth in these MSAs in 1998 may be an area of concern because the high-tech sector has a history of wide swings in employment growth rates compared with most other types of employment (see Chart 5). For example, the standard deviation of the annual job growth rates for California's high-tech sector from 1973 to 1998 is nearly three times that for total employment less high-tech jobs.
The combination of the Asian situation, the 1998 downturn in high-tech jobs, and an industry with a history of large variations could be especially important in states and MSAs with large high-technology clusters. These MSAs typically are dependent on both high-tech employment and exports. Moreover, rapid commercial real estate (CRE) development in most of these MSAs during the upswing in high-tech has resulted in some community banks having a relatively high level of exposure to commercial real estate loans compared with their peers elsewhere in the Region or nation (see Table 1). Thus, the slowdown in high-tech, combined with softening in commercial real estate in some of these markets (see Regional Outlook, First Quarter 1999, Several of the Region's Metropolitan Areas May Be Vulnerable to Overbuilding as a Result of Rapid Commercial Real Estate Development), could adversely affect local economic performance and insured institutions that have been heavily involved in construction and CRE lending.
The following paragraphs review high-tech conditions and bank exposure in five San Francisco Region MSAs with well-developed high-technology clusters. The MSAs (listed by size) are San Jose, Phoenix-Mesa, Portland-Vancouver, Salt Lake City-Ogden and Provo-Orem together, and Sacramento.
Silicon Valley Slowdown Affects the Bay Area
The slowdown in San Jose's manufacturing sector in 1998 dampened employment growth in the MSA as well as in the entire San Francisco Bay Area8 and was a key factor in forecasts of slow growth in years ahead. As shown in Chart 6, high-technology's weakness in the San Jose MSA was widespread. Computers, defense electronics, and electronic components (semiconductors) all reported job losses in 1998 after adding jobs in 1997. As a consequence of the deterioration in high-tech jobs, employment in durable goods manufacturing fell 3.5 percent in the 12 months ending December 1998. Measured by total job growth, San Jose fell from being one of the Region's fastest-growing MSAs to one of its slowest-growing MSAs. The San Francisco Bay Area also reported softening in job growth trends. Moreover, as high-tech slows and the Bay Area's economy cools, there do not seem to be many signs of a rapid turnaround. With the Asian crisis lingering, exports falling, and key sectors of the industry still facing overcapacity, Regional Financial Associates (RFA) projects a job growth rate of only 1 percent for the San Jose MSA in 1999.
8 The Bay Area as defined here includes nine counties located in the following MSAs: San Francisco, San Jose, Santa Rosa, Oakland, and Vallejo-Fairfield-Napa.
The decline in San Jose's manufacturing sector is significant because it is the world's most important high-technology center. High-tech plays an enormous role in the health of the San Jose MSA, as well as that of the larger San Francisco Bay Area. At year-end 1998, San Jose's manufacturing sector accounted for almost 27 percent of total nonfarm payroll employment, almost twice the 15 percent figure for the nation. A broader measure of high-tech employment used by RFA includes high-tech service and communications jobs, as well as manufacturing jobs. This broader measure indicates that over 25 percent of all jobs in the San Jose MSA are high-tech-related.9 This dependence on high-tech also is evident in San Jose's export statistics. According to ITA, the San Jose MSA was the nation's second leading export center in 1997, and high-tech related exports accounted for $27.6 billion of its $29.1 billion in exports. Finally, exports to Asia, which had risen at a 9.5 percent rate in 1996, declined by 7.8 percent in 1997, even though the crisis did not hit until midyear.
9 RFA uses a broader measure of high-technology that includes biotech, medical and photographic instruments, and software services in this ratio.
The slower economy in 1998 has not yet adversely affected San Jose's community banks, which produced strong ROAs and reported low past-due loan ratios, also shown in Table 1. However, high-tech employment expansion during 1996 and 1997 created booms in San Jose's residential and commercial real estate markets. The area's active real estate market, which has only recently begun to slow, has provided San Jose's community banks numerous opportunities in construction and CRE lending. San Jose's community banks have increased their construction lending concentrations significantly since year-end 1993, from 5.0 percent to a high 11.8 percent of total assets as of year-end 1998, much higher than the rest of the Region or the nation, as shown in Table 1. The ratio of commercial real estate loans (including construction loans) to total assets is also much higher in San Jose's community banks than in the rest of the Region or the nation. Furthermore, five of the seven community banks in San Jose have commercial and industrial loans totaling more than the Regional average of 15 percent of their assets. Although asset quality and earnings remain strong in San Jose's community banks, high exposure to construction, commercial real estate, and commercial and industrial loans may increase risk in the future should the high-tech slowdown continue.
Phoenix's Economy Continues to Grow Rapidly despite High-Tech Manufacturing Slowdown
Although the Phoenix-Mesa MSA continues to outperform the Region and the nation in the growth of nonfarm payroll employment, its manufacturing sector is beginning to slow, principally in the area of high-technology. Most of Arizona's manufacturing jobs are located in the Phoenix MSA (78 percent), where high-technology firms such as Motorola, Intel, Honeywell, and Allied Signal rank among the top ten employers. Despite the fact that Phoenix is relatively less reliant on manufacturing (11.3 percent of total employment) than the nation (14.5 percent of employment), the MSA remains exposed to a slowdown in the manufacturing industry because of its high concentration of exports to struggling Asian markets.
The current weakness in Phoenix's high-technology sector may be a direct result of the Asian crisis. According to the ITA Exporter Location data for 1997, the Phoenix MSA is especially exposed to slowdowns in the global economy, as it ranks tenth in the nation among MSAs for dollar value of exports. In addition, the ITA stated that over 40 percent of Arizona's exports are destined for Asia and that 77 percent of the state's exports are high-tech goods. Therefore, deterioration of global economic conditions, especially in Asia, may be a main driver in the decline in job growth in durable goods manufacturing in 1998, as well as a factor leading to slower growth in the future.
Following the downward trend across the Region, year-over-year employment growth in durable goods manufacturing in the Phoenix MSA has plummeted from a sizzling 9.2 percent recorded for the 12 months ending December 1997 to a much slower 2.2 percent growth rate for the comparable 1998 period. Phoenix's manufacturing employment slowdown could worsen as a result of layoffs recently announced by top employers in the MSA. RFA states that Intel and Motorola together reported over 4,000 layoffs in 1998. These layoffs could have broad-based effects on the aggregate Phoenix economy in 1999 and 2000.
Nonetheless, banking conditions in the MSA remain robust. Two trends in the MSA's insured institutions are worth noting. First, there has been significant growth in both the aggregate amount of assets held at community banks as well as in the number of community banks in the area. Since 1995, 11 new community banks have been chartered in Phoenix, bringing the total to 22. During this period, total assets at insured institutions in Phoenix have nearly doubled, from $1.5 billion at year-end 1995 to $3.1 billion at year-end 1998. This increase may lead to more competition among lenders. The second trend is the strong asset quality reported at insured institutions. The past-due loan ratio for banks in Phoenix is 0.69 percent as of year-end 1998, materially less than the ratio for the Region as a whole.
Weakening Exports to Asia Hit Portland's Economy Hard
Portland has been significantly hurt by the Asian crisis. Much of Portland's economic strength prior to 1998 was attributable to its growing manufacturing sector, particularly high-technology. Intel, Tektronics, Boeing, and similar firms transformed Portland into one of the hottest high-tech centers in the nation. These firms brought in jobs directly and indirectly through rapid construction of new plants, service firms, and housing production. Labeled the "Silicon Forest," Portland's durable goods manufacturing jobs account for nearly half of all manufacturing jobs in the state. However, after significantly outpacing the nation in terms of job growth, population growth, and economic prosperity, Portland's economy is showing signs of slowing (see Chart 7).
At the core of this problem is the decline in exports to Asian markets, as products produced in the United States have become relatively more expensive than goods produced in Asia. Growth and oversupply in the sub-$1,000 PC market have put additional pressure on already thinning profit margins. Chart 4 shows that durable goods manufacturing in Portland lost jobs at a rate of 2.7 percent in 1998. As Chart 7 shows, jobs in computers and office equipment have been hit hardest. Computer manufacturing jobs fell 19.8 percent in the past year owing to substantial layoffs. Most manufacturing plant expansions have either been postponed or cancelled. Komatsu, which once promised to be the largest semiconductor producer in Silicon Forest, recently announced the closure of its third facility in the area, a facility where it had earlier planned a further $50 million investment. Intel, which has its largest operation in Portland and is Portland's largest employer, announced a corporationwide layoff of 3,000 last spring. This deterioration in high-tech job growth has caused dependent secondary markets such as construction and commercial real estate to slow as well. Year-over-year job growth in the construction sector was only 2 percent as of December 1998.
Table 1 shows that although Portland's community banks continue to report strong performance and capital levels well in excess of minimum requirements, they have become significantly more exposed to commercial real estate. In the past five years, these institutions have increased their total loan concentrations in commercial real estate (including construction loans) from 17 percent to 26 percent of their assets. At the same time, there has been an uptick in past-due and noncurrent loan status for multifamily and construction and land development loans.10 Nonetheless, the allowance for loan and lease losses, at 1.19 percent of total loans, has remained well below the average 1.66 percent for similar-sized institutions in the Region. In fact, 8 of the 12 community banks in the Portland MSA have less than the Regional and national averages in loan loss reserves to total loans.
10 These categories are two of the three loan categories that comprise commercial real estate loans.
Utah's Metropolitan Areas Show Deterioration in High-Technology Sectors
In 1998, combined employment figures for the Salt Lake City and Provo MSAs showed continued weakness in durable goods manufacturing, likely because of a reduction in high-technology exports to Asia (see Chart 4). High-tech had contributed significantly to the economic expansion of the MSAs over the past decade. High-technology firms such as Novell, Gateway, and Intel helped fuel this growth by opening and expanding facilities. The current high-tech slowdown warrants monitoring, because during the past high-growth period for these MSAs, community banks significantly increased their exposure to traditionally higher-risk loan categories such as construction and commercial real estate loans.
According to ITA, as of the first quarter of 1998, Utah's exports to Asia declined 14 percent from the same quarter in 1997. This figure is in sharp contrast to the rapid export growth that both Salt Lake City and Provo experienced during the 1993 to 1997 period. The deterioration in export markets is reflected in the employment statistics of these MSAs as well.
The slowdown in manufacturing may pose an emerging risk for community banks operating in these MSAs, since they have some of the highest construction and CRE loan concentrations in the Region. Community banks in these MSAs have significantly increased their exposure to construction loans since year-end 1993. As Table 1 shows, community banks in Provo and Salt Lake City now have combined construction loans to total assets of over 15 percent, well above averages for both the Region and the nation. Their CRE loan exposure is also quite high. While these institutions continue to report strong earnings and asset quality, the local economy's recent slowing may increase the risks associated with a heavy concentration in construction lending.
Technology Slowdown Hits Sacramento while Defense Employment Continues to Decline
Much like some of the Region's other high-technology centers, the Sacramento MSA saw its manufacturing employment growth rate slow considerably during 1998. As shown in Chart 4, durable goods manufacturing jobs fell 2.5 percent in 1998, after rising nearly 10 percent in 1997. Prior to 1998, the Sacramento area had benefited from relocating Silicon Valley firms, which had moved to escape the higher costs of Silicon Valley. This influx of technology companies has spurred residential and commercial real estate development in certain areas of the MSA. While the expansion of high-tech companies has brought jobs to an MSA traditionally dependent on government employment and suffering from defense cutbacks, it has made the MSA more susceptible to the global trends hurting some firms that manufacture PCs and semiconductors.
The growth in manufacturing employment prior to 1998 helped keep Sacramento's employment growth rate above that of the nation since year-end 1995. The MSA benefited from its proximity to Silicon Valley during the 1990s, when such prominent companies as Intel, Packard Bell/NEC, Hewlett-Packard, Oracle, and Apple Computers opened or expanded operations. As Chart 8 shows, the strong growth in manufacturing has helped offset declines in defense employment, in particular the closings of Mather Air Force Base and the Sacramento Army Depot, as well as the privatization and downsizing of McClellan Air Force Base.
While the Sacramento MSA remains an attractive destination for high-technology companies in the long term, manufacturing employment contracted during 1998, primarily because of technology layoffs. According to RFA, Packard Bell/NEC cut employment at its south Sacramento PC manufacturing plant owing to the intense cost competition in the sub-$1,000 PC market. Intel and Hewlett-Packard, which together contribute about 10,000 jobs to the MSA, postponed further plant expansion in 1998 because of oversupply in the processor and PC markets, according to RFA and the Sacramento Business Journal. The slowdown is potentially troublesome since, according to RFA, up to 3,000 workers at McClellan will lose their jobs by 2001, as several airplane maintenance contracts shift from McClellan to Hill Air Force Base in Utah.
Despite the recent slowdown, the expansion of technology companies has led to strong residential and commercial real estate development, especially in warehouse and research and development (R&D) properties, in south Placer County, the Highway 50 corridor, and south Sacramento. The ten community banks headquartered in Sacramento have benefited from the hot property market, as construction loans now equal 12.6 percent of total assets, significantly above the national and regional averages (see Table 1). Their ratio of commercial real estate loans to total assets is also well above regional and national averages. Further, economic growth, as well as past banking consolidations, have spurred several new community bank charters. The slowdown in manufacturing and defense, coupled with the increased competition from newly chartered banks, could increase risk for community banks operating in the area, which continue to hold higher levels of nonperforming assets than peers in the Region and nation.
The San Francisco Region continues to exhibit robust growth, albeit at a slower pace than in 1997; the slowdown can be attributed to a contraction in manufacturing employment, particularly high-tech manufacturing. The slowdown in this sector is important because the growth in high-tech manufacturing employment prior to 1998 was one of the key reasons that the San Francisco Region has outperformed the national economy since 1994. The Asian financial crisis was the primary culprit in slowing the Region's high-tech manufacturing employment growth, since the Region is heavily dependent upon high-tech exports to Asia. However, thus far, there is little evidence that the 1998 slowdown in high-technology has hurt the performance of most of the Region's financial institutions.
Several MSAs in the Region are more vulnerable to the slowdown in technology than others because high-tech companies tend to cluster in MSAs with well-educated workforces, strong transportation systems, and vibrant R&D centers. These MSAs include San Jose, Phoenix, Portland, Salt Lake City/Provo, and Sacramento. Partly as a result of the clustering of high-tech companies and rapid high-tech employment growth prior to 1998, each of these markets has experienced strong residential and commercial real estate development. Moreover, community banks in these MSAs, for the most part, have higher construction and commercial real estate loan concentrations than their peers in the Region and the nation. Community banks with high levels of construction and commercial real estate loan concentrations should consider the potential risk of continued weakness in the high-tech sector and its effect on their local economy.