Though the California recession officially ended four years ago, nearly three dozen community banks still feel its effects, the state's chief banking regulator said.
Conrad Hewitt, commissioner of California's Department of Financial Institutions, said 35 state-chartered banks have been classified as troubled by the Federal Deposit Insurance Corp. These institutions, which have a combined $4.8 billion of assets, either lack sufficient capital, have weak management, or carry a high percentage of nonperforming loans.
"With such good times now, these problems shouldn't exist," Mr. Hewitt said. "Hopefully, the problems will go away, or these banks will be acquired or merged."
The banks are 17% of California's state-chartered commercial institutions and have Camels ratings from the FDIC of 3, 4, or 5.
Banks get Camels ratings after undergoing mandatory exams that measure capital levels, asset quality, earnings, liquidity, and management practices. Camels 1 ratings are assigned to the strongest banks; any with a Camels grade of 3 or less is considered at risk.
Nationwide, 345 commercial banks are rated Camels 3 or less, according to the FDIC. In California, 20 of the 35 troubled institutions are rated Camels 4 or 5.
The FDIC does not identify the specific banks, and the managers of these institutions are not required to disclose their Camels ratings. Mr. Hewitt brought the California situation to light in a recent interview discussing his future as commissioner.
Mr. Hewitt's one-year term ends June 30. He has said he would like to stay on another year, but the state Senate, which would have to approve this extension, is considered unlikely to do so.
Most of the state's troubled banks are hampered by soured real estate holdings left over from the recession, such as undeveloped land and apartment buildings, Mr. Hewitt said. The assets are not earning any return on the banks' balance sheets and have been written down by 30% or more of their original market value in most cases.
He added that a new economic downturn could be disastrous for these banks, many of which are privately held and have less than $100 million of assets. The state has not closed a commercial bank since October 1995.
California bank observers were surprised by the FDIC's listing, which reflect Camels ratings through last December. "It sounds a bit high, but regulators have toughened their standards," said Richard Decker, president of Belvedere Capital Partners, a San Francisco venture capital firm that invests in California community banks.
But given the health of the state's economy, at least one community bank investor seemed confident that the troubled banks would recover. "Most problems are resolving themselves," said Eric D. Hovde, executive vice president of the Washington-based consulting firm Hovde Financial Inc.
Still, an FDIC official said, improving a Camel rating can take years. "These problems are not a quick fix," said Robert Walsh, policy director at the agency. "You can't just wave a magic wand and hope they go away."