Banks continued to make progress last quarter reducing their exposure to commercial real estate, but it is too soon to declare an end to their problems.

"We're seeing a reduced inflow of nonperforming real estate loans," said David A. Aloise, division executive for restructured real estate at Bank of Boston Corp. "That is being offset by harder work trying to get rid of problem assets."

Some experts say an increasingly tough market for real estate sales will force banks to take additional losses. This prospect follows a quarter in which some banks built loss reserves equal to nearly half the loans' face value.

Bleak Outlook in California

Moreover, the slow economy could cause more problems, and conditions are still worsening in California.

Wells Fargo & Co and BankAmerica Corp. gave investors and analysts the most unpleasant surprises

New problems prompted Wells to add $400 million to reserves last quarter. BankAmerica's goodwill, reflecting newly recognized losses on assets being acquired from Security Pacific Corp., increased by $800 million.

"We're still looking at a multi-year process," said Nancy A. Bush, who covers eastern banks for Brown Brothers Harriman. "And we're looking at a core of nonperformers that are going to be on the books for some time."

Reflecting a shift toward disposing of bad assets, Fleet Financial Group and First Chicago Corp. announced bulk sales, using one-time gains to reserve for real estate-related losses.

Nursing Troubled Assets

But analysts noted that few have the capital to add to reserves. Most will probably favor nursing troubled assets back to health, either by working with developers or seeking investors to assume smaller mortgages.

Optimism that the actions by Fleet and First Chicago would set a price floor for real estate -- and ultimately revive the market -- quickly evaporated.

"Fifty cents on a dollar now is probably on the high end" of what banks can expect to recover, said Ms. Bush.

Indeed, First Chicago revised its estimate of the average it expects to get to 49 cents on the dollar, from 54 cents.

And Fleet told analysts it was carrying troubled assets at 45 cents on the dollar, Ms. Bush said. Previously the bank had anticipated a $500 million bulk sale for 50% to 55% of face value.

A spokeswoman said the average in the First Chicago portfolio dropped because some of the better assets were sold before the portfolio was formed.

Also, because the bank expects to sell the better assets first, the average should continue to drop, which wouldn't necessarily require additional reserves, the spokeswoman said.

Andrew P. Garr, who heads Millennium III Real Estate Corp., New York, said latecomers will be stuck trying to sell unleasable property, because buyers in earlier deals will have gotten a head start in pitching space to business tenants.

Due to overbuilding, "20% is going to stay vacant for years to come," Mr. Garr said. "Do you want to be the last guy to wade into the market?" Because not everyone can be first, he said banks should focus on workouts rather than liquidations.

50 Cents on the Dollar

Weston Andress, a senior vice president who heads bulk sales for NationsBank Corp., said well-leased property still can command significantly above 50 cents on the dollar. But he acknowledged 50 cents may be the most banks can get for unimproved land.

Analysts noted that Bank of Boston and Signet Banking Corp. had preceded First Chicago and Fleet in liquidation strategies. And both had already tested prices in the area of 45% of the face value of original loans.

That put Bank of Boston in position to announce two major acquisitions in the quarter and restore its dividend. Signet announced an increase in its dividend.

"At a bank like Midlantic, the reserve coverage is simply not as high" as at Signet or Bank of Boston, said John A. Heffern, bank analyst at Alex Brown & Sons. "One would have to wonder if their recovery might not be interrupted by a poor quarter."

"The real risk is some surprising fallback into recession," he said. But banks are "in a position to muddle through in most cases."Making HeadwaySelected changes in nonperformingloans for the third quarter Total Change ($ millions) from 3Q 1991Bank of $846 -51%BostonSignet 243 -31Nations-Bank 1,702 -11Fleet 1,424 -10Chase 4,347 -2 Source: Company reports

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