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Regional banks, Texas commercial real estate focus of Dallas Fed report

For immediate release: June 24, 2010

DALLAS—The latest issue of the Federal Reserve Bank of Dallas' Southwest Economy features articles on the health of the region’s banking industry, Texas commercial real estate, Juárez maquiladora employment and the federal government’s E-Verify program.

Banks in the Eleventh Federal Reserve District—Texas, northern Louisiana and southern New Mexico—have outperformed their counterparts nationwide, even in the midst of a recession, according to research officer Kenneth J. Robinson in “Eleventh District Banking Industry Weathers Financial Storms.”

“Whether measured by profits or problems, the Eleventh District banks were roughly ‘twice as good or half as bad’ as their counterparts across the nation,” Robinson writes.

Eleventh District banks had higher profitability than U.S. banks overall in the first quarter of 2010, Robinson finds. The percentage of noncurrent loans in the district increased to 2.7 percent but was much lower than the national figure of 5.5 percent.

The most plausible reason district banks have outperformed banks across the nation is the regional economy’s performance. The Eleventh District entered the recession later than other parts of the country, and its decline in economic activity was less severe, Robinson says. In addition, Texas housing markets have held up well compared with the nation.

One area of concern for district banks is commercial real estate loans, which account for almost one-fourth of district banks’ assets, far exceeding the national average of 13 percent.

In “Cloud Over Commercial Real Estate Is Slowly Lifting in Texas,” business economist D’Ann Petersen says with the Texas and national economies turning a corner and demand in the rental and investment markets stirring, a bottom in commercial real estate (CRE) may be in sight.

“The outlook for CRE may not yet be optimistic, but it is less gloomy,” Petersen writes.

Landlords have reduced rental rates for industrial and office buildings, sparking some recent lease deals, according to Dallas Fed business contacts. In addition, investor interest in CRE is growing, and property sales are edging up from the doldrums.

Sectors of the economy that drive real estate demand show improvement, according to Petersen. Renewed growth in Texas retail sales, exports and employment in professional and financial services is an encouraging sign for Texas property markets.

Despite glimmers of hope, challenges remain, Petersen notes. A rising volume of distressed assets and maturing CRE loans present hurdles for Texas banks—especially in light of tight credit conditions and property devaluations. CRE lending will likely remain subdued while banks address these concerns.

Moreover, given the still weak conditions in rental markets, it will likely be quite a while before construction of offices, warehouses or retail centers picks up significantly, Petersen says.

Juárez maquiladoras have been expanding their payrolls since August 2009 and employment levels are now above year-ago levels, according to this quarter’s “SpotLight.”

Dallas Fed economists have developed a model to track Juárez’s monthly maquiladora employment, an important economic indicator for the El Paso–Juárez region. Juárez is home to more than 10 percent of Mexico’s export-related jobs.

In an “On the Record” conversation, Lisa Roney, immigration consultant and former director of research and evaluation in the U.S. Citizenship and Immigration Services' Office of Policy and Strategy, says a Westat study showed the government’s E-Verify program detects about half of all unauthorized workers run through its system.

E-Verify is a free, federally operated electronic program that lets employers determine whether newly hired employees are legally authorized to work in the U.S. E-Verify is mandatory for most federal contractors but voluntary for most other employers. In the 2009 fiscal year, 18 percent of new hires nationwide were run through E-Verify, Roney says.

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Media contact:
Alexander Johnson
Phone: (214) 922-5288
e-mail: alexander.johnson@dal.frb.org