Region’s Small Banks Hurt Most by Slump, Study

Southern California’s small banks have suffered more than other financial institutions in the state’s economic downturn and are likely to face further problems because of the soft real estate market, a study by the Federal Reserve Bank of San Francisco concludes.

The study, “Southern California Banking Blues,” scheduled to be published Oct. 23, found that the Southland’s community banks--those with less than $300 million in assets--have been hurt more than both the state’s big banks and community banks elsewhere in the state.

According to the study, Southern California’s community banks earned a lackluster 26 cents for every $100 in assets during the first half of the year, compared to 61 cents for Northern California’s small banks and 71 cents for San Joaquin Valley banks. A return of $1 for every $100 in assets is a benchmark for excellence.

In addition, they study notes, 28% of the small banks in Southern California lost money in the first half of the year, compared to 23% in the San Francisco area and 10% in the Central Valley.

“Independent banks are products of their communities, and Southern California has been hit harder than the rest of California and most of the rest of the country,” said Craig Hudson, western regional director for the Independent Bankers Assn. of America in Newport Beach.

“Factors beyond the control of independent banks are impacting them, namely a deteriorating economy and a plunging real estate market,” Hudson said.

The study makes clear that commercial real estate is the biggest area of concern, although business and consumer loans are becoming problems as well. Nearly one out of three dollars loaned out by community banks in Southern California is related to real estate.

“Independent banks were very aggressive in the market,” said Gary Zimmerman, a bank economist who authored the study, which looked at the state’s 386 community banks, including 222 in Southern California.