Just a few years removed from a harrowing commercial real estate debacle, California's community banks have pumped up their commercial real estate portfolios again.

This time, however, they're lending in different areas, eschewing riskier construction-and-development lending in favor of owner-occupied and Small Business Administrated-related real estate lending, according to data from Sheshunoff Information Services.

For instance, commercial real estate loans were only 31.7% of total community bank loans in the state in 1991. At the end of last year's third quarter, they had rebounded to 44%. The increased reliance on commercial real estate, so hard on the heels of a recession that felled dozens of small banks in the state in the early 1990s, illustrates the importance of commercial real estate to this state's 414 community banks.

Commercial real estate credits include four loan types: construction and development, nonfarm, nonresidential real estate, multifamily residential, and loans secured by farmland.

Nationally for community banks - defined as those with less than $3 billion of assets - total commercial real estate loans averaged just 25.2% of total loans.

The overall increase in California, however, masks a huge shift in the type of commercial real estate credits. Construction-and-development loans were down substantially from four years ago, while there was a jump in nonfarm, nonresidential loans, which include SBA credits.

In 1992, $5.32 billion of California community bank real estate loans were tied up in construction-and-development loans. That number had been almost halved by the end of September 1995, to just $2.78 billion.

In the Los Angeles area, which was hit especially hard by falling land values, such loans fell from $2 billion to $728 million.

At the same time nonfarm, nonresidential loans increased substantially, from $10.54 billion in 1992 to $13.13 billion in 1995. Some bankers feel part of that change can be attributed to an increase in SBA lending.

"California is the No. 1 SBA lending state in the nation and the banks here are really out there looking for business," said Harvey J. Nickelson, president and chief executive of Coast Commercial Bank, in Santa Cruz. "I don't see many SBA loans out there for more than $100,000 that aren't real estate related, so the numbers aren't surprising."

The other components of commercial real estate lending, farmland and multifamily residences, were each up slightly from 1992.

John E. Rossell 3d, president and chief executive of Heritage Bank of Commerce in San Jose, said he sees the overall increase as a direct result of improving industry conditions.

"I think in California we have banks that have regained their footing and have been profitable for two years now," he said. "A third of the banks in the state were under memorandums and now they're out from under those and are back in the market and being very aggressive. The increase is a result of that."

John W. Glover, chief financial officer for United Valley Bank in Farmersville, pointed to the nature of community banking as a partial explanation.

"You're talking about commercial real estate, but you're not talking about multibillion-dollar projects," he said. "There's risk, but it's not terrible risk and it's something a community bank is supposed to do."

Banks throughout the state were hit hard by plummeting real estate prices during the recession of the early '90s. Some regions, such as Southern California, experienced a drop of 30% or more.

"California has generally had a much greater percentage of real estate lending than the rest of the nation, and that's still the case today," said Gary C. Zimmerman, economist with the Federal Reserve Bank of San Francisco. "And starting in about 1984, there was a pretty dramatic shift from other types of loans to real estate."

That move was to prove painful when a nationwide recession took hold a few years later. "California was just so far out of line with the rest of the nation as far as real estate loans as percentage of total loans," Mr. Zimmerman said.

California's community bank performance is bouncing back. Return on average assets up to 0.91%, well ahead of 1992's 0.22%. In the same span, the return average equity jumped to 10.32% from 8.54%.

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