Housing - How California Goes, So Goes the Nation (Part 2)

FDIC-insured institutions based in California report strong earnings and asset quality.

• Banks and thrifts based in California continued to report strong profitability in the second quarter. The second quarter median pretax return-on-assets (ROA) ratio of 1.81 percent was down slightly from 1.96 percent a year ago, but remained higher than the national median. The net interest margin for institutions headquartered in California increased by 11 basis points as higher interest income outpaced increases in interest expense (see Chart 4).

• Loan performance also remained strong. California’s FDIC-insured institutions reported a median loan delinquency of only 0.27 percent of loans in the second quarter, down from 0.33 percent a year earlier and well below the national median of 1.27 percent.

California’s commercial real estate markets continue to strengthen.

• According to Torto Wheaton Research (TWR), second-quarter vacancy and rental rates among office and industrial properties improved in most California metro areas compared to a year ago (see Chart 5). Though declining, vacancy rates for office and industrial properties in Oakland, Sacramento, and San Jose remain above the national average.

• Concentrations of commercial real estate (CRE) loans among California institutions continued to be high (sixth highest in the nation) relative to capital in second quarter 2006. Strong growth in construction and development (C&D) loans is also pushing C&D loan concentrations higher. Exposures to C&D loans remain higher on average among institutions based in the Central Valley and Central Coast than in Southern California or the San Francisco Bay Area.

• Strong commercial property fundamentals and solid home-price appreciation have contributed to low past-due CRE loan rates.

And, also from the FDIC: Commercial Real Estate conditions continue to improve in Arizona. According to Torto Wheaton Research, rental rates for Phoenix office and industrial properties continue to increase as vacancy rates decline. In addition, Property & Portfolio Research reports that Phoenix multifamily vacancies have fallen, in part because rental properties are being converted to condominiums. However, this trend could reverse if higher interest rates prompt condominium investors to return projects to the rental market.

Housing - How California Goes, So Goes the Nation (Part 1)