Banks in Central Valley Of California Reflect A Sluggish Economy

Earnings of community banks throughout California's Central Valley offer evidence the region is still struggling with lingering effects of the early '90s' recession.

Community banks in the rest of the state, however, are in full recovery.

"The economic engine that really drives the Central Valley is the L.A. basin, which hasn't done a whole lot," said Philip L. Hage, an analyst at Van Kasper & Co., San Francisco. "The L.A. basin has been a drain on the Central Valley in the past, and it's going to be a neutral influence this year."

But though banks in Los Angeles showed a significant rebound in 1995 as job growth picked up, the Central Valley continued to slog along.

Extending from north of Sacramento to south of Bakersfield, the agriculture-intensive Central Valley didn't reach the lows that Southern California experienced early in the decade, but it has also failed to bounce back as strongly. The past year was mediocre for the region's community banks.

Jim Holly, president and chief executive of Bank of the Sierra, Porterville, said layoffs and a downturn in real estate values, both in Southern California and the Central Valley, have hurt the region.

"Retirees from Southern California are a big part of our economy. What has happened in the past was that the retirees would sell their homes in Southern California and move up here," he said. "But the recession really hurt prices down there, and the retirees either weren't selling or they were moving out of state. That, in turn, hurt our real estate market."

Bank of the Sierra was one of the stronger performers in the region. It posted a slight increase in net earnings in 1995. Other Central Valley institutions that enjoyed successful years included San Joaquin Bank, Bakersfield, and Merchants National Bank of Sacramento.

But earnings diminished at most banks. Capital Corp of the West, Merced, parent of Town & Country Bank, reported an 80% profit decline, largely due to real estate writeoffs, and Visalia Community Bank was off 35%.

Clovis Community Bank, First Northern Bank of Dixon, and Regency Bank, Fresno, also earned less in 1995 than in 1994.

"I think the future for the area is great, but the real estate downturn did in fact hit us last year, as it has for the past three years," said Steven F. Hertel, president and CEO of Regency Bank. "Things are picking up slowly, but I still think real estate supply is a little stronger than demand."

Vallicorp Holdings Inc., Fresno, the biggest banking company in central California, posted a $10.2 million profit last year, up 30%. But its 1994 results had been sapped by merger activity and restructuring and most likely would have been at least equal to 1995 on an operating basis.

Wolfgang T.N. Muelleck, Vallicorp's chief financial officer, agreed the region's economy had improved somewhat, but the improvement had yet to make itself felt in banks' results, he said.

One banker said he expects community banks to benefit from industry consolidation.

"What's happening is all our local competition has gone away," said Stephen M. Annis, chief financial officer at Bank of San Joaquin in Bakersfield. "We've already had a number of new customers come over to our bank from First Interstate after their merger with Wells Fargo was announced.

Other signs point to a brighter future for the Central Valley, most notably population increase. The region's population grew more than 13% during the past five years, which is above the state's 10% average. That translates into more spending.

Mr. Holly of Bank of Sierra said he anticipates the economy's improving in the coming year.

"I think we're going to work our way out of our present depressed economy," he said. "Job creation in the region's industrial sector will resume, and there will be more balance in the housing element."

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