The Atlanta Regional Outlook, second quarter 2001, examined economic and competitive factors that could affect bank performance in metropolitan areas; however, some nonmetropolitan counties may share similar risk factors. The Atlanta Region's rapid growth over the past decade and the increasingly important issue of urban sprawl have blurred the distinctions between many metropolitan and nonmetropolitan counties. To focus on areas where competitive pressures may be high, we considered nonmetropolitan markets where ten or more insured institutions compete. Of the 424 nonmetropolitan counties in the Atlanta Region, only 25 have ten or more insured institutions with offices accepting deposits within the county. Of these 25, all but 3 are adjacent to metropolitan areas.
We developed an economic classification for nonmetropolitan counties by modifying a methodology used by the United States Department of Agriculture (USDA). The USDA's Rural-Urban Continuum defines counties bordering a metropolitan area with at least 2 percent of the workforce commuting to that metropolitan area as Adjacent. Otherwise, the counties are identified as Not-Adjacent. We further classified Adjacent counties into three groups: Dependent, Independent, and Mixed.
Dependent counties are adjacent counties whose economies are tied closely to the bordering metropolitan area. Independent counties are those that remain heavily dependent on a particular local industry. Mixed counties generally appear to be in a transitional stage because they continue to be affected by traditional industries, yet there may be an increasing spillover effect from bordering metropolitan areas.
Some patterns in banking market structure emerge using our classification of nonmetropolitan counties that are home to at least ten insured institutions. The number of institutions and offices in all market types except Independent grew during the latter half of the 1990s. Although all market types were dominated by superregional or regional banking companies, Dependent and Not-Adjacent counties were comparatively less concentrated; consequently, the degree of competition may be higher in these areas. In addition, nearly one-third of the insured institutions operating in Independent counties are headquartered locally, compared with 25 percent among the other county types. Finally, Dependent and Not-Adjacent counties, which displayed the highest overall levels of per capita income, also hold the highest levels of deposits per capita.
Insured institution performance and the overall risk profile can vary significantly by geographic location and local economic structure. Community banks1 headquartered in the 25 counties in our analysis generally exhibit a different risk profile and underperform other nonmetropolitan banks. At year-end 2000, Atlanta Region community banks operating in highly competitive nonmetropolitan counties held less capital and larger loan portfolios--with a greater concentration in real estate loans, particularly in the traditionally higher-risk construction and development loans--and relied more on borrowed funds because of lower core deposit levels than other nonmetropolitan areas with fewer market participants. These characteristics have been apparent during much of the recent economic expansion. The risk profile of these community banks more closely resembles that of an urban bank than does that of the typical nonmetropolitan community bank. Also, while the banking markets exhibit more favorable growth potential than those of other nonmetropolitan counties, they may be less desirable to large insured institutions if the level of competition constrains customer profitability.
1 Community banks include all Call Report filers, commercial banks, and state savings banks with assets of $1 billion or less.
Following the nation, New England's economic growth slowed through midyear 2001. As of June, nonfarm employment in the Region was up 1.5 percent from year-ago levels, a sizable deceleration from the prior year's pace. Initial unemployment claims between January and June significantly exceeded year-earlier levels. Rising unemployment and an increase in personal bankruptcy filings also resulted from the slowing economy by midyear. Despite continued strong appreciation in home prices, existing home sales were flat or down slightly during the first quarter. New permit volume has been easing since 1998 in the Region, and much of the weakness has been centered in southern New England. The Region's economy, along with the nation's, hinges on the continued strength of consumer spending.
Fraudulent activity poses an ongoing and significant risk to financial institutions. Fraud manifests itself in many forms; however, the vast majority of fraud is carried out by a firm's own employees. Effective measures should be in place to protect a firm's assets and minimize potential losses arising from internal fraud, which can lead to loss and, in extreme cases, failure. Several studies of the reasons for bank failures suggest that insider fraud was a significant contributing factor to the failure of anywhere from 11 percent to 33 percent of failed institutions. In light of the fact that nearly 3,000 banks and thrifts have failed in the past 20 years, these findings underscore the importance of managing fraud risk. Historical patterns suggest that evidence of fraud increases following a downturn in general economic conditions, which reveals situations that may be masked during good economic times. In fact, Suspicious Activity Report filings related to crimes of an internal nature--including bribery, embezzlement, misuse of position, and mysterious disappearance--have begun to rise after remaining fairly stable during the past three years.
Fidelity insurance coverage is a necessary safeguard against fraud loss. Boards of directors are responsible for ensuring that effective measures are in place to minimize potential losses arising from internal fraud. Fraud cannot be entirely eliminated; however, strong internal controls and comprehensive audit programs are the most effective means of both deterring and detecting internal fraud. As fraud represents a source of significant or even catastrophic loss to any institution, residual risk should be shifted to other parties through appropriate levels of fidelity insurance coverage. Coverage is especially important in small institutions that may not have the resources to devote to the more sophisticated fraud programs that larger institutions are capable of administering.
Fidelity insurance coverage levels among insured institutions may be worth reviewing in light of deteriorating economic conditions. The median level of fidelity coverage has remained fairly constant across all asset sizes since the late 1980s. While there has been a noticeable rise in financial institution bond (FIB) levels, aggregate fidelity coverage has remained fairly flat. The increased fidelity coverage provided by Clause A of the FIB has been largely offset by elimination of coverage under excess employee dishonesty bonds. The increased coverage for losses covered by nonfidelity clauses of the FIB is a positive trend. However, it is somewhat surprising that fidelity coverage has been flat, given the fact that a significant percentage of bank failures have been attributed directly to insider fraud and abuse.
Savings banks typically carry lower levels of fidelity coverage than do their commercial counterparts. Data obtained from the Surety Association of America and the Association of Certified Fraud Investigators suggest that the risk of fraud and abuse in savings institutions, from a fidelity perspective, is not significantly dissimilar to that of commercial organizations. As savings institutions make up 70 percent of all banks in the Boston Region, this observation is worthy of consideration.
Effective fraud deterrence and detection policies are the first lines of defense for minimizing exposure to fraud. Fidelity insurance plays an important backup role in preserving the solvency of an insured institution that is victimized by a significant fraud event. Ensuring that all these aspects of an effective fraud risk management program are in place is an important function of the board of directors and senior management, and becomes particularly important during periods of economic uncertainty.
Recent economic crosscurrents triggered noticeably slower growth and uncertainty about the future for households and major industries in the Region.
Labor markets weaken and households face pressure. Employment growth in the Region turned modestly negative in second quarter 2001 as a growing number of layoffs occurred in the manufacturing sector and smaller employment gains occurred in most others. Manufacturers trimmed the length of the workweek and, thus, average weekly earnings for many workers. Households also faced higher energy prices and the average 401(k) retirement account balance failed to rise in 2000. All these developments contributed to a decline in consumer confidence.
Real estate sector presents a mixed picture. Residential resales and permits for new construction remain high in the Region. In contrast, conditions in commercial real estate (CRE) markets changed fairly abruptly. Weaker conditions were widespread in suburban office markets, while vacancy rates jumped for downtown office space in Indianapolis and Columbus.
Inventory correction is a key to the economy's near-term health. Production cutbacks are occurring in many industries because inventories are high relative to the pace of sales. The rise in inventory-to-sales ratios is most pronounced among producers of durable goods, which have a relatively large presence in the Region. A correction seems well under way in the light-vehicle sector, where domestic auto stocks fell considerably after year-end 2000 and production turned up in the second quarter. In contrast, recent inventory-to-sales ratios were high for primary and fabricated metals and other important sectors despite production cutbacks.
How crosscurrents will play out is unclear. Positive developments in the first half of 2001 include lower interest rates, tax rebates, stable residential markets, and reduction of the inventory imbalance for motor vehicles. On the other hand, activity in the manufacturing and CRE sectors is likely to remain a drag on the economy until current imbalances are resolved.
Sluggish economy pressures banks' asset quality and interest-rate risk management. Although some deterioration occurred in first quarter 2001, overall asset quality reported for the Region's banks and thrifts appears favorable, while aggregate capital levels are high by historical standards.
Economic weakness may affect insured institution asset quality adversely, however, particularly at institutions that have exhibited aggressive risk selection. Slower economic growth has also contributed to sharp reductions in interest rates, which may improve profitability for some insured institutions but present interest-rate risk management challenges for others.
Asset quality has deteriorated somewhat at large banks and thrifts. Large institutions in the Region, much like their counterparts nationwide, have experienced some asset quality weakening. The Region's large banks and thrifts reported a past-due and nonaccrual (PDNA) ratio of 2.42 percent on March 31, 2001, up 53 basis points from a year earlier and the highest in 12 quarters. The 2000 Shared National Credit Review program showed a second significant increase in classified and criticized credits, albeit from a very low base. Indications from the 2001 review are that this trend is continuing.
Concentrations in traditionally higher-risk assets have increased among community institutions. Increasing volumes of traditionally higher-risk loans and higher loan-to-asset levels may have heightened the credit risk for the Region's community banks. For example, 32 percent of institutions reported CRE exposure in excess of 200 percent of Tier 1 capital in early 2001, up from 19 percent in 1990. Loan delinquency levels have risen recently, yet remain well below levels of a decade ago. However, insured institutions with concentrations in CRE, commercial and industrial, or agricultural loans represent a significant share of those institutions with higher PDNA ratios.
In addition to rising credit exposure during the past decade, institutions faced an increasingly competitive environment, particularly for traditional funding sources. Competition on both sides of the balance sheet has led to significantly lower net interest margins despite increased credit exposure. Even so, aggregate profitability has held up well, thanks to a low level of problem loans, correspondingly low provision expenses, and the cultivation of noninterest income. The recent economic slowdown may weaken these positive trends.
A slowing economy adds more uncertainty to the Dallas Region's agricultural sector. Prolonged price weakness, rising expenses, and weather-related issues have dampened profitability for most agricultural producers. However, government payments and strong levels of off-farm income have averted more serious problems for agricultural producers and their lenders. Signs of a slowing economy and prospects for a new farm bill could weaken these supports for the industry.
The effects of a decline in government payments may not be felt as acutely in the Dallas Region. Government payments and net farm income for 2001 are forecast to be considerably lower than in 2000. However, Congress recently approved an additional $5.5 billion of emergency aid for the 2001 crop year. While this allocation indicates a certain level of concern on behalf of Congress, it is substantially less than the $9.7 billion funded last year.1
1 Jackson, Ben. May 14, 2001. "Farm Group Sees Shortfall In Budget Aid." American Banker.
During 1999, 39 percent of the Dallas Region's net farm income was derived from government payments, significantly less than the 50 percent average nationwide. This difference is attributable to the strong presence of the livestock sector, which does not receive government payments. Specifically, 69 percent of the Region's agricultural cash receipts are derived from livestock products, compared with 51 percent for the nation.2 Livestock prices have performed well during the past two years, and this sector's current strength has protected the Region's agricultural industry somewhat from the effects of declining government payments this year.
2 USDA, U.S., and State Income Data 1999. http://www.ers.usda.gov/data/farmincome/finfidmu.htm.
Off-farm income helps to stabilize the economy. Another stabilizing effect on the general farm economy is the amount of off-farm income available to cover shortfalls in farming operations. The recent economic expansion and tightening labor markets have created new opportunities for nonfarm employment. Off-farm income in Texas and Oklahoma averaged almost $80,000 per farm household at year-end 1999--an increase of 116 percent since 1991, and 38 percent greater than the national average.3
3 USDA, Household Income Data 1999. http://www.ers.usda.gov/Briefing/FarmIncome/
In addition, commercial farms4 saw their share of total household income derived from off-farm sources rise to 69 percent, an increase of 11 percentage points from 1991 to 1999. This increase helped mitigate problems that could have resulted from depressed commodity prices and sluggish exports. An economic slowdown would diminish the overall prospects for off-farm employment and income, increasingly used to supplement total farm household income.
4 Farms reporting annual sales of $50,000 to $250,000.
Problems in the agricultural economy have not manifested in bank portfolios, but some weakness is emerging. In the aggregate, agricultural banks continue to report strong balance sheets and steady profits despite depressed agricultural conditions. However, the bottom 5 percent of the Dallas Region's agricultural banks reported a negative average return on assets (ROA), continuing a downward trend that began in 1997. The difference between the average pretax ROA for the Region's agricultural banks as a group and the "worst" performing members of this group is widening at an accelerating pace.
The 2002 farm bill is an unknown quantity. While it is unclear at this time what direction the new farm bill will take, most congressional leaders agree that ad hoc disaster payments are not a long-term solution for farm policy. Many members of Congress support keeping a market-oriented farm bill that also contains provisions to support farm income. Taking this a step further, the administration's position, as stated by U.S. Secretary of Agriculture Ann Veneman, emphasizes that any safety net for farmers and ranchers should be consistent with an evolving and dynamic global marketplace.5 However, many industry analysts view ongoing attempts to move U.S. producers toward a free market approach as problematic because of the subsidies offered by other countries in the global agricultural marketplace.
5 Remarks of Secretary of Agriculture Ann M. Veneman at the Sparks Companies 9th Annual Food and Agriculture Policy Conference, Washington, DC, April 17, 2001.
Heavy reliance on government payments makes uncertainty about these payments a key concern. Despite a prolonged period of low commodity prices, the Region's farm banks continue to report sound asset quality, in large part because of increasing government support to farmers. Much of this support has been ad hoc emergency and loan deficiency payments, which represented slightly less than two-thirds of the $22.9 billion in total payments last year. However, going forward, farmers are unsure about the timing and amount of these payments at a critical time--when they are deciding what to plant. Moreover, the farm bill expires in 2002, and it is not clear what direction farm support policy will take under new farm legislation.
The Region's farmers are highly dependent on government payments, although this dependence varies across the Region (see Chart 1). Generally, farm banks with the highest concentrations in farm lending and whose borrowers show the most reliance on government payments would likely exhibit the greatest exposure to changes in the level of government payments.
Assessing insured institutions' level of exposure to the agricultural sector is one way to evaluate the vulnerability of farm banks to declining government payments. Looking at a state's dependence on government support and farm banks' concentration in farm lending, North Dakota stands out in the Region. North Dakota's farmers are the most dependent on federal payments, and farm banks in that state tend to be relatively highly concentrated in farm lending.
The other states present a mixed picture. Although Iowa exhibits a relatively high dependence on government payments, its banks tend to be less concentrated in farm lending. Conversely, Nebraska and South Dakota farm banks tend to be more concentrated in agricultural lending, but these states' farmers appear to be less reliant on government payments.
However, the fact remains that all states in the Region are home to farmers who are highly reliant on government payments and to farm banks with relatively high concentrations in agricultural lending. As a result, the entire Region appears to be vulnerable, to some degree, to a significant reduction in government payments.
Large government payments have contributed to stable land values despite declining farm revenues. Despite large declines in farm operating net cash income during the past few years, farmland prices are holding steady or rising across the Region. In the aggregate, the value of cropland rose 3.6 percent and the value of pastureland rose 4.3 percent between year-end 1996 and year-end 1999, according to the most recent data available.
Nonfarm influences, such as urbanization and nonfarm residential and recreational use, are contributing to these sustained prices. However, a relatively high level of government payments appears to exert the greatest influence. Farmland, like other business property, derives its value from the ability to generate cash flow. Therefore, because government payments represent a portion of farmers' cash flow, they influence farmland value.
A reduction in government support could cause rising delinquencies and declining collateral protection. An analysis of the influence of government payments on land prices suggests that such payments accounted for as much as 52 percent of the Region-wide value of farmland in 1999, up considerably from 14 percent in 1996. As a result, even a small reduction in government payments to farmers could affect farmland values negatively and could result in escalating default rates on farm loans. Moreover, collateral protection could be eroded if current payments and the expectation of continued payments are supporting farmland values.
Economic conditions in the Region and the nation have slowed considerably in recent quarters, and the outlook remains uncertain. While banks and thrifts in the Region remain relatively well positioned to meet the challenges posed by changing economic conditions, this transition is affecting earnings performance and credit quality at insured financial institutions.
Earnings fell sharply in first quarter 2001, and further economic slowing could contribute to additional earnings erosion. Community banks (those with less than $1 billion in total assets) reported a median return on assets of 1.03 percent, down from 1.17 percent one year ago because of increased provision expenses and declining margins. Net interest margins, a vital component of community bank earnings, fell to a median 4.09 percent, the lowest level reported in the 17 years for which such data have been collected. Several factors likely contributed to historically low margins, including declining loan volumes, balance sheet optionality, and limited repricing of deposits.
Margins should benefit significantly from the considerable steepening of the yield curve during the first half of 2001, but this improvement could be offset by declining loan levels and increasing levels of nonearning assets if economic conditions deteriorate. Furthermore, additional weakening could contribute to higher provision expenses. While many banks and thrifts recently tightened lending standards in response to changing conditions, credit quality deterioration may occur in loans originated during a stronger economic period and under less stringent underwriting standards. Many banks and thrifts in the Region already report higher loan delinquencies than one year ago, with the increase centered in consumer and construction lending.
A growing consumer debt burden and numerous layoffs in recent quarters may lead to higher consumer delinquencies and loan losses. Recent job losses, most notably in the stressed manufacturing sector, raise concern about the ability of some consumers to meet debt service payments, which at a national level have climbed as a share of disposable income to the highest level since 1987. The Region's insured financial institutions, particularly those in rural areas, appear more at risk to deterioration in consumer loan quality than institutions in other parts of the nation because of higher exposure levels and potentially weaker consumer finances. Without a quick economic recovery, consumer credit quality in the Region may deteriorate further. A significant number of layoff announcements continued into second quarter 2001 and many previously announced layoffs have only recently occurred, suggesting that the number of unemployed is likely to rise. As unemployment benefits, severance packages, and savings are exhausted, consumer loan delinquencies may climb.
Banks and thrifts in some of the Region's metropolitan areas may be vulnerable to potential residential real estate market imbalances. At least half of the banks and thrifts headquartered in the Memphis, Fayetteville-Springdale, and Lexington metropolitan areas report construction and development loan concentrations equivalent to 100 percent of leverage capital. Many banks in Little Rock and Nashville also report relatively high exposure. Among these five markets, Memphis banks appear most vulnerable because of substantially higher concentration levels, a preponderance of speculative rather than presold development, and an oversupply of existing homes.
Risk managers face challenges with the economy in transition. Strong economic conditions throughout most of the 1990s provided creditors with greater comfort and flexibility in the application of underwriting standards without incurring substantial additional risk. However, the current economic slowing raises the level of incremental risk associated with each credit decision. Regardless of whether the recent slowing is merely a temporary inventory adjustment or part of a more pronounced cycle, it does require front-line risk managers to adjust to a less forgiving economic climate.
The economic tide has risen since the beginning of the 1990s; however, the Region's counties have not benefited equally. "Vibrant counties," those that ranked in the top third of economic performance over the past five years,1 tend to be located in the suburban and exurban rings around the Region's major cities. These counties track the I-95 corridor between New York City and Washington, DC, and extend up to the Hudson River valley to Albany. During the latter half of the 1990s, vibrant counties experienced higher population and employment growth rates and had a more diversified job base, relative to the nation, than the Region's less vibrant counties. Many of the Region's vibrant counties also benefited from strong growth and higher-paying jobs in the construction, finance, insurance, and real estate industries. Conversely, the share of jobs in the stressed manufacturing sector in the Region's less vibrant counties, although declining, is roughly twice that in vibrant counties.
1 The Region's 178 counties were ranked by the degree of change in employment, population, income, and single-family home prices between 1996 and 2000 and industrial diversity relative to the nation.
Banks in vibrant economies report higher margins but greater credit risk.
The Region's insured institutions have benefited from the rising economic tide, reporting strong loan growth and favorable credit quality. The Region's banks also have higher average capital ratios than a decade ago. Nevertheless, local economic conditions have contributed to differences in performance and credit risk profiles among the Region's banks. After declining throughout much of the late 1990s, net interest margins (NIMs) reported by the Region's banks have improved. However, banks in the Region's vibrant counties reported NIMs increasing to a greater degree than did banks in less vibrant counties. A moderate increase in the percentage of commercial loans, which are typically higher-yielding loans, and stronger core deposit growth have contributed to this difference in NIMs. Moreover, while institutions Region-wide face increased competition for core funding, banks in the Region's less vibrant economies face the added challenge of unfavorable population and personal income growth trends. Additionally, banks in less vibrant counties hold loan portfolios characterized by a longer maturity, which reflects a greater proportion of residential loans. This portfolio composition also may have contributed to NIM compression when the yield curve was relatively flat in the late 1990s.
Despite slightly higher past-due ratios reported by banks in less vibrant counties, insured institutions in the Region's vibrant economies might be more vulnerable to losses. According to a Federal Deposit Insurance Corporation study of the 1980s banking crisis, bank failures that occurred a decade ago generally were concentrated in the Region's markets that had experienced rapid growth, particularly speculative commercial real estate (CRE) development.2 The Region does not currently exhibit the economic imbalances it experienced a decade ago; however, a softening economy could lead to a weakening in credit quality. Moreover, should margin pressure increase, banks in less vibrant economies holding lower-yielding portfolios may be tempted to shift into traditionally higher-yielding, higher-risk assets or expand their geographic lending area, which could heighten credit risk profiles.
2 Federal Deposit Insurance Corporation. History of the Eighties--Lessons for the Future, Vol. I: An Examination of the Banking Crises of the 1980s and Early 1990s. 1997. Washington, DC: FDIC.
Economic slowdown affects office markets.
Recent evidence suggests that some of the Region's office markets may be experiencing the effects of the economic slowdown. According to recent reports,3 many of the Region's major office markets, including New York City, northern New Jersey, Long Island, Philadelphia, Washington, DC, Westchester, and Wilmington, experienced negative absorption, increased vacancy rates, and declining rents in the first half of 2001. Despite recent increases, vacancy rates in many of the Region's office markets remain below the national average.
3 Torto Wheaton.
CRE credit quality reported by the Region's banks has remained favorable; however, delinquency ratios have slightly increased since mid-2000. Softer economic conditions could pressure vacancy and rental rates, thereby affecting the repayment capacity on loans that assume a continuation of the high rental rates achieved at the height of the recent economic expansion.
The Region's employment growth outpaced the nation's, but decelerated through second quarter 2001. Weakness in the manufacturing and high-tech sectors contributed to the slower growth. Should the national economy continue to slow, job creation could also be affected adversely in the high-tech manufacturing, lumber, and tourism industries, three sectors that have contributed significantly to the gross state products of many states in the San Francisco Region. Continuing weakness in these key industries could contribute to additional deterioration in commercial and industrial (C&I) loan quality among the Region's insured institutions.
High-tech manufacturing, particularly semiconductor production, has slowed owing to worldwide cutbacks in capital expenditures. Many semiconductor manufacturers announced disappointing results and layoffs during the first half of 2001. The semiconductor industry represents a significant component of the high-tech manufacturing sector in Oregon, Idaho, Arizona, and northern California.
Increasing imports and declining overseas demand have contributed to weakness in the timber industry. In addition, rising energy prices could pressure lumber producers and processors further, which could adversely affect the economies of Washington, Oregon, and Idaho.
Continued economic slowing could also affect travel-related industries that are critical to the economies of Hawaii and Nevada. Visitor counts have already declined in Hawaii, and the Las Vegas hospitality industry could feel the effects of reduced corporate spending, higher energy prices, and increased gaming competition.
Commercial and industrial delinquency and loss rates have increased in recent periods at many of the Region's insured institutions, particularly large banks. Between year-end 1999 and March 31, 2001, delinquent commercial and industrial (C&I) loan ratios increased, particularly among large institutions. Year-end 2000 C&I loss ratios also rose at many of the Region's established commercial lenders, and gross C&I losses represented an increasing share of total loan losses. Overall, commercial loan delinquency and loss rates remain low by historical standards; however, rising levels are of concern, given that C&I lending contributes significantly to many institutions' loan portfolios and incomes.
During the late 1990s, increased competition for C&I loans contributed to easing underwriting standards, which could adversely affect credit quality going forward. Several trends have contributed to the intensity of C&I loan competition. Credit-scoring models improved the cost-effectiveness of small business lending for larger institutions, prompting many smaller institutions operating without these models to grant underwriting concessions. Community banks also have faced increased C&I loan competition from thrifts and newly chartered banks. Flagging core deposit demand in the late 1990s contributed to higher funding costs and profit pressures industry-wide, prompting savings institutions and new banks to compete directly with commercial banks by offering higher-yielding commercial loan products.
Some of the drivers of increased competition are not yet recession-tested. For instance, credit-scoring models, developed primarily since the last recession, have not been tested through a full credit cycle. Likewise, new banks and thrifts that have increased C&I lending activity recently might not have experience in managing, monitoring, and controlling an increased level of C&I credit risk during a slowing economy.
During a period of brisk competition and aggressive loan growth, some insured institutions have increased C&I loan concentrations and pared staffing resources. The relative size of small business loans has grown, most notably among metropolitan insured institutions with less than $100 million in total assets. Given that C&I loan portfolios often experience higher loss rates than other loan categories, an increase in the average size of a small business transaction could weaken loss reserves at small institutions more quickly. Finally, sustained C&I loan growth throughout the Region has stimulated demand for qualified commercial loan officers. At the same time, however, some bankers are reporting a shortage of seasoned commercial lenders, and the level of serviced assets per full-time equivalent employee ratios are on the rise.
Should the economy continue to slow, the effects of increasing competition could combine with weakness in the high-tech manufacturing, lumber, and tourism sectors to erode insured institution C&I credit quality.