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Surviving the financial storm

The shakeup of the U.S. financial system this week shows the magnitude of the credit crisis, and any significant economic recovery could be at least 18 months away, executives of Citizens Bank said Tuesday.

But consumers can weather the storm by paying heed to Citizens’ advice: Stay calm, make conservative business decisions and keep the crisis in context.

“It has worsened somewhat, with the problems at Bear Stearns, Fannie, Freddie and now Lehman and Merrill Lynch,” said Tim Peterson, chief credit officer at Nevada City-based Citizens Bank, rattling off some bleak financial headlines. “The subprime loans went everywhere.”



Peterson has been through three recessions in his banking career: In the 1980s, 1990s and the more modest slump of 2000. This one is different, however: It stems from the subprime mortgage game, so it’s harder to predict the fallout.

“It could go on for a while,” Peterson said. “This is the first time that investments like this have been challenged the way they have.”




Citizens did not make any subprime loans or carry any on its books, he added.

But like all local businesses, the bank is feeling the general fallout from a downturn in construction and a spate of speculative real estate investing before the bubble burst, among other factors, said Citizens Chief Executive Judy Hess, whom The Union invited to its offices on Tuesday, along with Peterson, to discuss the credit crisis.

“Construction and its related businesses are very slow,” Hess said. “Don’t expect that to be increasing anytime soon.”

When the economy does come back, local housing prices might feel more like they did in 2003 than in the previous go-go years, according to some financial services officials.

One recent economic bright spot has been the drop in oil prices: Down more than a third since July to $92 a barrel on Tuesday, Hess and Peterson observed. Consumers will benefit from any further drop in gas prices.

Citizens, founded in 1995 with assets of about $350 million, is taking proactive steps. For the quarter ending in June, the company recorded a loan loss provision of $950,000, up from $220,000 during the same period the prior year.

Banks are expected to continue increasing their loan loss reserves to guard against a rise in non-performing loans, said Hess.

She remained optimistic about the future, largely because of Citizens’ button-down approach to banking.

“We’ll continue to do what we do best: Make the good loans and support people who are having a hard time and be understanding,” Hess said.

Independent banks growing

Independent community banks such as Citizens have been the darling of the banking industry in recent years. “Community banks are the engines that in many regions of this nation keep local markets going day to day,” as Camden Fine, president of the Independent Community Bankers of America, put it.

Nearly 8,500 community banks exist nationwide, with assets ranging from less than $10 million to a few billion dollars. They comprise 98 percent of all banks and are growing while the total number of banks decreases because of consolidation. The newer community banks are likely to feel the most financial pressure during the downturn, according to banking officials.

Though “one stop shop” financial service giants such as Citicorp have stumbled (including closing an office here), the community banks benefit from an intensely local focus: Lending to small businesses, providing more personal customer service and with boards comprised of local citizens with the interest of their towns at heart.

Though solidly profitable, well-capitalized and growing, Citizens has suffered setbacks, just like any business.

The bank made an $8 million loan to the developer of the Highlands housing project in Grass Valley, part of its commitment to affordable housing. The project went into foreclosure, however ” a first in the bank’s history.

Now the homes have a new marketing manager, have been re-priced and are going back on the market, and bank executives are confident they will sell over time.

The stock of parent Citizens Bancorp (CZNB) is trading at $11.35 per share, down from a 52-week high of $21.90. The decline reflects an industry-wide decline in financial stocks.

The company’s dividend appears safe. In May, Citizens declared a 5 percent stock dividend, the third straight year it has made such a payment. As Citizens Chairman Ken Baker put it: “The declaration of a common stock dividend reflects our commitment to pay dividends … yet manage our cash and preserve capital for future growth.”

As for consumers, they need to remember the basics of investing to weather the downturn, the executives said: Keep a diversified stock portfolio, remember that bank deposits are insured at least up to $100,000 and ” above all ” don’t panic.

Citizens was one of the first banks to participate in a program known as CDARS that lets customers enjoy FDIC insurance on deposits up to $50 million. The plan does the legwork of taking your deposits and spreading the risk around to numerous banks.

For example, its would be equal to opening 5 savings accounts at 5 separate banks to receive FDIC insurance for $500,000. The plan works for nonprofits, public funds and businesses, not just individuals.

Like others, Hess also said now is a good time to refinance or buy a home because of historic low interest rates.

Some CD rates are good, too, despite low interest rates. Some rates for 1-year CDs are more than 4 percent, at GMAC Bank of Fort Washington, Pa., and Zions Bank of Salt Lake City, Utah, according to BankRate.com.

As for the keeping the slump in context, Hess offered a reminder that boom-and-bust cycles are hardly new here. After all, she said, the area was founded on gold mining.


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