REPORTER'S NOTEBOOK: Calif. Bank Presidents Upbeat on the State

NAPA, Calif. - Craig Hudson, executive director of the California Independent Bankers, maintains that his state's economy is not as bad as some make it out to be.

"I'd like to dispel the notion - and I think there's a commonly held belief out there - that the California economy is in a long-term decline," Mr. Hudson told bankers assembled at the group's annual presidents' retreat at the Silverado Resort and Country Club here in the heart of wine country.

"I think that the paradigm is shifting, but I don't think that we're in a steady decline," he said. "We've seen improvement, I think we've seen loan demand increase."

And California, with the world's seventh-largest economy, has many opportunities for community banks, he said, including a vast, young work force and a surge of new small businesses. The state added 50,000 businesses in 1994, he said.

"These are the natural customers of independent banks," he said. "We're really blessed in California, because the backbone of our economy is small business."

Mr. Hudson's remarks were echoed by many of those in attendance and by several speakers, including George Masa, regional director of the Federal Deposit Insurance Corp. in San Francisco.

Previously, more than half of California's banks had a Camel rating of three or lower. Camel ratings are on a one-to-five scale, with one being the best.

Now the number of the worst-rated banks is going down, Mr. Masa said. Fewer than 40% of the state's banks now hold the three lowest ratings, and he expects the trend to continue. "There's no reason California cannot be heading toward 100%" of banks with ratings of one or two, he said.

Bankers, for the most part, were cautiously optimistic.

"I think we've probably bottomed out, and we're slowly coming up out of it," said William J. Lewis, executive vice president of Eldorado Bank, Irvine.

But, he conceded, "we have to change the way we do business."

For instance, his bank is expanding its product and service line. Most recently, it has developed an international department, a business line many West Coast community banks are cultivating.

California community bankers also must refocus their lending activity, bankers said.

"You've got to be less dependent on real estate," said Terry C. Jorgensen, president and chief executive officer of Bank of Hollywood, whose market has been hit in recent years by both natural and man-made disasters, including earthquakes and riots.

"And that's hard in California," added Mr. Lewis.

However, they and other bankers said they were tapping into the commercial lending opportunities that Mr. Hudson discussed.

James C. Holly, president of the Bank of the Sierra, Porterville, had no choice but to cut back on real estate. In his area, the housing market for middle-market to high-market homes is down 50% from three years ago, because people in Southern California can't get a good price for their own homes and therefore can't trade up.

"That's really hurt our lending activity," Mr. Holly said. So the bank has focused on its agricultural and construction lending and its credit card business.

Overall, Mr. Hudson said he believes independent banks have a brighter future.

"What I would like our community banks to realize about the upturn (is that) as the economy gets better, it releases the grip of the regulator around their neck," Mr. Hudson said. "They should not be involved in a frenzy thinking they must merge or get bigger."

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Throughout the conference, the independent bankers congratulated themselves for what they deemed a victory in the interstate branching battle.

They had pushed for - and got at the last minute - an amendment to a state bill to opt in early on interstate branching, which otherwise goes into effect in 1997.

The amendment requires out-of-state purchasers to buy an entire bank, not just a branch, to gain entry into the state. The bankers believe the measure will preserve franchise values.

The amendment to the bill, which was signed last week, was added at the last minute by the state's Senate appropriations committee after the banking committee defeated a similar measure.

"This was a lost cause," state Sen. Charles Calderon, who wrote the amendment, told the bankers. "But you made it happen."

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