MONTEREY, Calif. - Southern California community bankers came of age in the past 10 years with a confident mantra: "If you're in the dirt, you can't get hurt."

Muscled out of the retail business by their bigger brethren, small banks in the Golden State dug for gold in commercial and residential real estate development. For years, it worked.

But real estate values in Los Angeles, San Diego, and,the "Inland Empire" - a sprawling suburban area that blossomed out of desert east of Los Angeles - plummeted in 1991.

Caught Off Guard

And community banks, with neither the experience to deal with such problems nor the wherewithal to dispose of them quickly, are left holding the bag.

The California Independent Bank Presidents' Retreat this year gathered a record number of tanned, smiling attendants - 160 - to the luxurious Spanish Bay resort here. But the gladhanding and the golf masked deep disappointment.

"Our chunk of the pie was that much larger when things were going good," Frederick Chin, senior manager of real estate valuation and appraisal services at Kenneth Leventhal & Co. in Los Angeles, told one group of bankers. "Consequently, our share of the problems is that much bigger now."

Signs All Around

There is ample evidence of how deep Southern California banks' real estate problems are.

* In the Federal Deposit Insurance Corp,'s quarterly survey of real estate, examiners in California were the only group to say that their banks' real estate markets had worsened in the three previous months.

* Salomon Brothers conservatively estimates that a recovery in real estate will take hold in California is late 1994 citing the net drop in personal incomes. And, "when a recovery does take hold in California, it likely will be slow to develop, uneven, and disappointing," Salomon's David Hensley wrote.

* The Federal Reserve Bank of San Francisco reported recently that small banks in Southern California metropolitan areas experienced the most serious deterioration in performance in the country in 1992, largely because of their overexposure to real estate.

The bank found that problem construction and single-family mortgage loans actually increased throughout 1992 and into 1993, when the rest of the industry was recovering from problem real estate loans.

How long California's community banks can wait for the recovery is an open question. Eleven banks in the state have failed this,year, compared with eight in all of last year. And several small banks in Southern California are teetering.

Regulatory Pressure Cited

Steven Fried, president and majority owner of Western United National Bank in Los Angeles and chairman of the Independent Bankers Association of America's Western Council, said real estate is the No. 1 problem right now, but he argues that regulatory pressure is as much a factor as oversupply.

Derek Thomas, partner in charge of real estate consulting in the San Diego office of Kenneth Leventhal, said that even with good projects, community bankers in Southern California will not make loans.

"Most bankers have reached the conclusion that it's not worth the brain damage to convince the regulators that a good real estate loan is worth the risk," Mr. Thomas said.

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