Stashing your cash in a smaller bank: Some spooked Valley consumers move their money to community banks and credit unions.

Nov 20, 2008 (The Fresno Bee - McClatchy-Tribune Information Services via COMTEX) -- WM | Quote | Chart | News | PowerRating -- As big banks and brokerages get battered by the economy, some consumers in the central San Joaquin Valley are moving their money to community banks and credit unions.

Federal Deposit Insurance Corp. data show smaller institutions gaining deposits while some of the region's largest banks have contracted -- by tens of millions of dollars over the past two years in some cases.

Even with Merced-based County Bank announcing a third-quarter loss of $54.6 million this week, experts aren't looking for a reversal for other local banks.

Leaders of some Valley banks and credit unions say much-publicized failures of IndyMac Bank and Washington Mutual Bank sparked jitters, driving cash into smaller institutions. They say the trend isn't huge, but they aren't complaining.

"When some of our largest institutions were having problems, customers were getting a little confused and trying to figure out where to put their money," said Dan Doyle, president and chief executive of Fresno-based Central Valley Community Bank. "We literally had people lining up to open accounts" as Washington Mutual collapsed.

Bank of the Sierra, based in Porterville, also saw an increase in deposits around that time.

"There's a perception in the general public that a smaller bank might be safer," said Jim Holly, Bank of the Sierra's president and CEO.

Depositors go small

Local bankers hesitate to call it an exodus of cash from big banks. But money was on the move in the Valley even before this summer's big-bank blowup. From Merced through Kern counties, information from federal regulators shows five of the six banks with the greatest deposits on their books saw declines in the millions between 2006 and 2008. During the same period, deposits in many community banks climbed.

Among Valley-based banks, Bank of the Sierra was the biggest gainer in the two-year period as deposits increased by about $118 million.

The same thing isn't necessarily happening across the entire country.

Joe Morford, a banking industry analyst with RBC Capital Markets in San Francisco, said such benefits for smaller banks appearto be confined to markets where failed banks had a strong presence such as Washington Mutual, which has 34 branches from Merced to Kern counties.

Nationwide, however, "I think those who have been the biggest beneficiaries are the larger banks themselves," Morford said. "People are moving their money to some of the larger banks perceived to be the safer institutions. ... We're definitely seeing a flight to safety, or a flight to quality."

National figures from the Federal Deposit Insurance Corp. show that deposits in large banks -- those with assets greater than $10 billion -- rose by about 20% between mid-2006 and mid-2008. During the same period, deposits in institutions with assets under $10 billion also rose, but at a much slower pace of 1.6%.

But big banks may be losing their dominance. In its Quarterly Banking Profile, the FDIC reports that while domestic deposits in its insured institutions grew by more than $156 billion in the first quarter of 2008, domestic deposits in the second quarter shrank by nearly $40 billion -- the largest single-quarter decrease since early 1999.

Doyle said the IndyMac bank closure in Southern California was "a real wake-up call" for bankers and customers.

"They failed not because they didn't have enough capital, but people lost confidence," said Doyle, who also serves as chairman-elect of the California Bankers Association. "For all practical purposes, they had a run on the bank" -- and not enough cash to cover the withdrawals.

Linda Reese, president of Tulare County's Tucoemas Federal Credit Union, said, "I've never seen anything like it."

She said the nation's financial meltdown means "everyone [in the industry] has to work so much harder now to work themselves out of it."

Most community banks and credit unions emerged relatively healthy by avoiding subprime loans -- which featured higher interest rates and targeted borrowers whose marginal credit made them a greater risk. Such loans are widely regarded as a major contributor to the nation's financial mess.

"That's one good thing for the community banks," Doyle said. "It's a nature of the size of the institution. The bigger banks have huge mortgage arms and that's a big part of their business."

Credit unions also are benefiting from a perception that they offer greater security, industry representatives said.

"We did have an inflow of deposits, especially from Washington Mutual customers," said Teresa Halleck, president and chief executive of the Golden 1 Credit Union, which has offices throughout Northern and Central California.

The surge of new cash into smaller banks and credit unions slowed when the government raised the maximum federally insured deposit from $100,000 to $250,000, officials said. "That calmed things down quite a bit," Halleck said.

Morford, of RBC Capital Markets, agreed.

"Since the government increased the insurance, we saw trends stabilize throughout the industry," he said. "We've moved through some of the worst of the fears."

Still lending

Credit unions and community bankers say they also have benefitted because they've got money available and aren't afraid to lend it.

"The credit unions and local banks are still lending money," said Mark Rapin, vice president of Freedom Ford and head of the Fresno-Clovis New Car Dealers Association.

But don't count the big banks out. Huge, diversified portfolios -- and the $700 billion financial stimulus package approved by Congress and President George W. Bush last month -- will enable big banks to weather a rough-and-tumble economic environment, analysts say.

As a result, community bankers and credit union managers are working hard to attract and keep bewildered consumers. They count simplicity and stability among their survival tools.

"Ours is a simple business," said Doyle. "We gather deposits and we make loans."

Holly of Bank of the Sierra agreed. "When you run a bank this size, we're closer to the capital and the shareholders," he said. "Chances are, we know the shareholders personally and we own shares ourselves, so we're not inclined to take any undue risks."

Yet, continued economic woes and falling real estate prices are causing problems even among the smaller players in the financial business.

"If you're going to be a lender in California, you can't avoid real estate loans," Doyle said. "And if the real estate market collapses, it's going to affect just about any institution."

Some of the small banks got caught in loans to real estate developers, where big front-end costs -- before lots were even sold -- caused a big headache.

Credit unions avoided many of those problems. Not having shareholders enables them to be more careful and selective in their lending, reducing their risk for financial disaster, said Daniel Penrod, an industry analyst for the California Credit Union League.

"Now that the storm clouds have arrived and dropped a significant amount of rain, the conservative nature of credit unions has shown to be a better model," Penrod said.

Comforting consumers

Bankers said they've had to do some hand-holding to reassure their customers about the security of their money.

"There was a lot of that for a while," Holly said. We "fielded a lot of calls from people calling, not to take their money out, but just to hear someone say, 'Hey, it's going to be OK.' "

Doyle said the same was true at his bank: "We're explaining to people that it really is safer to leave the cash in our vault than to take it out and put it in the mattress."

Those fears have tapered off, however, since the FDIC and the National Credit Union Association boosted insurance on deposits.

Even credit unions said some customers expressed concern.

"Like every financial institution, we've had people ask about stability and security," Tucoemas' Reese said. "But we've not seen anybody who's really anxious."

Tucoemas, whose membership is confined to people who live or work in Tulare County, didn't see a surge in deposits from the financial crisis.

"Our deposits have remained steady," showing slow growth, Reese said. "We're in a county that has over 10% unemployment, so people around here are using their money, not storing it away."

The reporter can be reached at tsheehan@fresnobee.com or (559) 441-6319.

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