Jul. 3--As the cash-strapped state of California on Thursday began sending out $3 billion in interest-bearing IOUs, a number of San Joaquin County-based banks said they would accept the warrants from existing customers.

Others, however, were deciding how to react, noting that the instruments carry far more risk, require more costly processing and auditing, than normal state checks.

Among those accepting the state IOUs are Delta National Bank, Bank of Stockton, Community Bank of San Joaquin, Farmers and Merchants Bank and Bank of Agriculture and Commerce.

"We're doing it because we have customers who are either in medical services or social services or other services that we know are direct recipients of state payments," said William Trezza, chief executive of the Bank of Agriculture and Commerce in Stockton.

By honoring the IOUs as if they were checks, Trezza said his bank also hopes to help lift the struggling economy.

"The last thing we need to do is dig in our heels in and say we're not going to take these things," he said Thursday.

One area institution still weighing its options was Pacific State Bank in Stockton. Delta National and Farmers and Merchants both decided to accept the IOUs on Thursday afternoon.

Kent A. Steinwert, president and chief executive of Lodi-based F&M Bank, said there are several downsides to the state warrants, including risk, complicated processing and redemption procedures and California's ongoing political crisis.

"The state's financial situation is not solid," he said. ... "These instruments are securities that could be held for a long period of time. ... We don't want to expose the bank to a lack of liquidity or undue risk."

On the political side, he said:

"In accepting these items, we're condoning and helping them in not doing their jobs in not solving the budget crisis. ... The legislature needs to do their jobs and not place the citizens of the state in this awkward position."

Outside banks, but with offices in San Joaquin County, accepting the state IOUs include Bank of America, Wells Fargo Bank and Central Valley Community Bank.

All the banks said they would honor warrants only from current customers, under certain conditions and with various other limitation.

State officials said Thursday they will begin issuing more than $3 billion in IOUs (formally known as registered warrants) to taxpayers, vendors, local governments and others California lacks the money to pay.

Those IOUs are set to be paid in full by Oct. 2 and will also yield 3.75 percent annual interest until redeemed by the State Treasurer.

Individuals holding the warrants to redemption will collect the interest. If a bank accepts the IOUs before redemption, it will get interest instead.

That's not a very attractive rate, several bankers said, given all the extra work associated with handling the warrants.

Contact reporter Reed Fujii at (209) 546-8253 or rfujii@recordnet.com.

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