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FEDERAL RESERVE SAYS COMMUNITY BANKS IN CALIFORNIA MIRROR STATE'S ECONOMY

 FEDERAL RESERVE SAYS COMMUNITY BANKS
 IN CALIFORNIA MIRROR STATE'S ECONOMY
 SAN FRANCISCO, Oct. 15 /PRNewswire/ -- Community banks in Southern California under-performed smaller banks located in other parts of California during the state's recent recession, says an economist at the Federal Reserve Bank of San Francisco.
 Writing in the bank's Weekly Letter of Oct. 23, banking economist Gary Zimmerman states that the banking industry's overall performance in California has been closely related to the condition of the economy. This means that because the recession has been more severe in Southern California, "smaller community banks operating there generally have faced a much harsher economic climate than either community banks elsewhere in the state or the larger banks that operate throughout the state.
 "The smaller community banks have only limited ability to diversify beyond their local communities," Zimmerman added. "Thus, community banks generally find their fortunes more closely related to the economic vitality of regions where they are located.
 "Since the downturn in the state's economy after mid-year 1990, problem-loan ratios have risen sharply and bank earnings have deteriorated. Much of the slowdown in the California economy has taken place in Southern California. Together, six major Southern California counties have lost over 520,000 jobs since the peak in employment in May 1990, accounting for most of the state's job loss."
 Noting that 386 of the state's 459 banks fit the description of community banks (institutions with assets of less than $300 million), Zimmerman said he studied 222 community banks in six major Southern California counties, 74 in the nine-county San Francisco Bay Area and 31 in the Central Valley counties of Fresno, Kern, Sacramento and San Joaquin. He examined the banks' problem real-estate-loan ratios and compared their return on assets (ROA).
 "The worst deterioration in real estate loan quality in the three subregions has taken place at Southern California community banks," said Zimmerman. "Their ratio of problem real-estate-loans has been above 7 percent for the last three quarters, and at mid-year it was more than double the ratio for the Central Valley. Moreover, asset quality problems extend beyond real estate lending, as problem loan ratios for total loans along with business and consumer installment loans also are the highest in Southern California.
 "ROA for the first half of 1992, was a dismal 0.26 percent for Southern California community banks, compared to 0.61 percent for Northern California and 0.71 percent for the Central Valley. Moreover, the share of banks losing money in the first half -- at 28 percent in Southern California -- also was higher than the comparable figures for the San Francisco Bay Area (23 percent) and the Central Valley (10 percent)," he added.
 Zimmerman said the deterioration of asset quality and earnings for community banks in Southern California, "is consistent with the weakness in the California economy over the last two years." He added that the outlook for a quick turnaround remains variable and cloudy.
 "The continued problems in commercial real estate lending and prospects for an 'overhang' of office space until the end of the decade, as some analysts have suggested, argue against a quick improvement in the important Southern California banking market," concluded the economist.
 -0- 10/15/92
 /CONTACT: Gary Zimmerman of the Federal Reserve Bank of San Francisco, 415-974-3194/ CO: Federal Reserve Bank of San Francisco ST: California IN: FIN SU: ECO


SG-TM -- SF001 -- 0539 10/15/92 15:04 EDT
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Publication:PR Newswire
Date:Oct 15, 1992
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