Southern California's community banks are finally getting a bit of their luster back.

After five years in a recession, the area's smaller institutions are beginning to show signs of life, thanks in large part to diversification in the job market and a firming of real estate prices.

"The economy is turning around because the real estate market is finally stabilizing. It's still low, but it's stabilizing," said Frank V. Riolo, president and chief executive officer of Borrego Springs Bank, Borrego Springs. "The job market has also stabilized, and there's finally been a return of jobs, which hasn't happened in three years.

"It's a real slow improvement, but things are picking up," Mr. Riolo added. "We made a small profit in 1995 after three years of losses."

Added Ben Crowell, chairman and CEO of Eldorado Bank, Tustin, "Southern California is coming back up off the bottom, and there are better times ahead."

Such optimism is not new for California, but in recent years the numbers hadn't backed it up.

After a three-year decline, total deposits at the 265 Los Angeles- and San Diego-area banks with less than $3 billion of assets increased in 1995, to $37.7 billion at Sept. 30.

Returns on assets and equity show Southern California is shaking off its lethargy. The region's community banks still trail the rest of the state in both measures, but their aggregate third-quarter ROA was up to 0.82%, from 0.22% in the same period of 1994. And ROE was at 9.29%, up from a negative 1.34% two years before.

During the same period, the ratio of nonperforming loans to total loans declined from 8.77% to 6.66%.

Defense industry cutbacks and plummeting real estate prices were behind much of the past half decade's problems. While the entire state suffered from the recession, Southern California was especially hard hit, as inflated land values fell.

"Certainly, the recession is over as far as wages and sales are concerned," said Charlotte Chamberlain, analyst at Wedbush Morgan Securities, Los Angeles. "The real issue remains real estate, and where banks lend in commercial real estate, the recession is pretty much over there, too. Residential lending is another matter, but banks aren't involved in that so much."

Several Southern California institutions made notable gains in 1995. Bank of Commerce, San Diego, enjoyed an 85% jump in earnings from 1994; Eldorado Bancorp, Tustin, was up 76%; and TransWorld Bancorp, Sherman Oaks, had a 56% increase.

Other big gainers included City National Corp., holding company for City National Bank, Beverly Hills, with a 31% increase in earnings; California State Bank, Covina, with a 29.7% increase; and Cenfed Financial Corp., parent of CenFed Bank, Pasadena, with a 21% jump.

Southern California's community banks, while recovering more dramatically, still lag their counterparts in the rest of the state.

California's 403 community banks earned 0.91% on their assets in the first nine months of last year, compared to 0.82% for those in the south. In addition, Southern California's community banks accounted for more than half of the $274 million in loan-loss provisions taken by the state's $3 billion-and-less banks in the first three quarters of 1995.

Still, the improvement is heartening to the battered independent banking community. More than two dozen independent banks in the state failed in 1993 and 1994.

"All the smaller banks are definitely doing better," Ms. Chamberlain said. "Community banks are doing remarkably well and have very much turned things around."

Part of the improvement in the job market has come from a characteristic source: Hollywood. The entertainment industry has created thousands of jobs in the region, helping offset the defense losses.

In addition, many displaced by cutbacks over the past few years have ventured into business on their own.

"The small-business segment has surged back," said Mr. Riolo of Borrego Springs Bank. "A lot of the people who were let go by bigger businesses started up their own companies, and a lot of them are doing well. They found a niche and filled it."

Mr. Crowell of Eldorado Bank, which is based in Orange County, said at least one simple factor shouldn't be overlooked.

"All you have to do is look at the weather in the rest of the country this time of year and then look at Southern California, and you have a good idea why California is the most populous state in the Union," he said. "Our weather has to be a factor in the state's diversity and prosperity.

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