In 1993, after three years of a recession and a real estate crisis that resulted in a mountain of bad loans and the failure of 47 of California’s banks, the chief executive officer of First Interstate Bank of California told a reporter, “The psychology of California has been altered in this recession more than at any other time.”

Could the state be preparing for a return of this real estate blight?

Cracks are beginning to appear: The failures of many of the state’s Internet-related firms and reduced expenditures by many other technology companies have prompted a well-documented increase in office-building vacancy rates in San Francisco and San Jose.

A recent report by the investment bank Keefe, Bruyette & Woods Inc. found that several of the state’s largest commercial banks have been steadily boosting their holdings of commercial real estate in California, some at rates outpacing the growth of their total loan portfolios.

Wells Fargo & Co. increased its commercial real estate loans in its home state by 19% by yearend 2000, while its loan portfolio as a whole grew 15.4%. Bank of America Corp., of Charlotte, N.C., piled on 7.9% more California real estate loans, while its loan portfolio grew just 5.8%, according to the Keefe Bruyette report.

Still, observers said it is unlikely trouble will surface, at least in 2001.

“We don’t think it’s this year’s issue for banks, and it may not happen at all,” said David H. Winton, an analyst at Keefe Bruyette and the author of the report.

Just as the state’s ongoing energy shortage has caused more hand-wringing over banks’ vulnerability than it has produced actual evidence of revenue or loan problems, commercial real estate exposure has been worrisome even if it will not damage earnings in the near future.

Roberta Fuhr, western regional manager for Key Commercial Real Estate, said the subsidiary of Cleveland’s KeyCorp is “looking at a correction during the next 12 to 18 months.” But she says the company, which will probably make about $900 million in permanent and construction loans in California this year, has isolated its concern to the office markets in the northern part of the state.

Wells Fargo’s real estate group has also noticed a slowdown in the office market in Northern California and, to a small degree, Southern California. A spokeswoman for the group says its portfolio is performing well. One reason is that it has no direct exposure to telecommunications or Internet companies.

As for the two banks with the biggest stakes in the commercial real estate market, Mr. Winton says there is no cause for alarm given the size of their loan portfolios overall. Wells Fargo’s $11.6 billion of commercial real estate loans make up 7% of its portfolio, while Bank of America’s $6.6 billion exposure accounts for just 1.7% of its loan book.

What concerns Mr. Winton, however, is the “trajectory” of such indicators as net absorption and vacancy rates. From the fourth quarter of 1999 to the first quarter of this year, vacancy rates in downtown San Francisco have risen from 3.88% to 7.66%. In San Jose, the vacancy rates have risen from 3.1% to over 4.7%, according to the real estate broker Grubb & Ellis.

The San Francisco Federal Reserve Bank, in its Western Economic Developments report for June, said that “the increase in vacancies” in San Francisco, San Jose, and Seattle “is not surprising in light of the difficulties that have befallen the high-tech sector.”

The state’s super-community banks have proportionately more exposure to real estate than their larger regional and national competitors. At Greater Bay Bancorp, of Palo Alto, commercial real estate loans in its home state are just over 46% of the its national loan total. “We’ve not seen any deterioration in that part of their portfolio, but I think investors by and large have more a conservative approach, and the stock has suffered as a result,” Mr. Winton said of Greater Bay.

At Westamerica Bancorp, of San Raphael, the ratio of commercial real estate to total loans is just under 40%, according to the Keefe Bruyette report. Westamerica president and treasurer E. Joseph Bowler said, “California is built on real estate and growth, so any bank” doing business there will be exposed to the real estate market.

He described the company’s typical commercial real estate customer as the owner of a business, like a furniture store. Despite the concentration of technology companies in the geographic region where Westamerica operates, Mr. Bowler said, “We are seeing no deterioration.”

Observers and bankers say that there is little chance of a reprise of the early 1990s’ crisis because lenders have learned important lessons.

One difference between that period and today — and one often cited as a cause for comfort — is that lenders underwrite credits using cash flow rather than just than the appraisal basis. In other words, banks value the property on the income the owner is expected to receive from tenants, rather than on the appraised value of the buildings nearby. The appraisal method was one reason that many banks saw the worth of their portfolios collapse in the early 1990s, when property values collapsed.

And lending on speculation — that is, to developers who don’t have their tenants lined up — is now a definite no-no.

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