Even community banks can't avoid credit woes: 'bumpy ride' predicted for rest of the year.

For the most part, community banks avoided making subprime mortgage loans, and are still making profits, but the lenders aren't immune to the national credit crisis, and an economy teetering on the edge of recession.

Higher levels of defaulting and delinquent loans have been popping up in practically every loan portfolio, requiring bankers to take a tougher look at who they extend credit, according to several bankers.

"Bankers are looking twice and thrice at the deals we are doing now," said Larry Hartwig, chief executive officer of California Community Bank in Escondido. "Everyone is being more cautious, particularly about how they (borrowers) may be affected by the real estate (downturn)."

Hartwig says as the real estate downturn continues, and higher gas prices don't appear to be stabilizing, things may get worse. "It's going to be a bumpy ride between now and the end of the year."

Still, California Community Bank and most other smaller lenders are reporting higher loan originations for the first quarter. In the first quarter, California Community's portfolio grew during the year by 27 percent; Security Business Bank increased its loans by 24 percent; and San Diego National Bank's loans were up 12 percent during the same period.

Buoyed by opening a fourth office in Encinitas, Hartwig's bank is picking up new business, and will likely show nice growth for the current quarter. Some customers are coming from megabanks that are dealing with lots of bad loans, and some from competing community banks, Hartwig said.

Saddled with escalating problem loans, larger banks are pulling in their reins. There have been some reports of borrowers getting their home equity lines reduced, said Rick Levenson, president of Western Financial Corp., a local investment banking firm specializing in community banks.

"Just when they need credit the most, it's being taken away from them," Levenson said.

That's causing a growing number of borrowers to seek out alternate financing options, including smaller banks, he said.

Yet declining real estate values in some markets are prompting practically every lender to scour portfolios, and set aside higher reserves on loans showing problems repaying or that have defaulted.

"No doubt everyone is affected," said Levenson, who is also a director at Seacoast Commerce Bank in Chula Vista.

In the first quarter, several local lenders reported surprising levels of problem loans. Imperial Capital Bank in San Diego had $110 million in nonperforming loans, or about 3 percent of its total assets. At Discovery Bancorp in San Marcos, noncurrent loans and foreclosed real estate made up about 7 percent of its total assets; and at Temecula Valley Bancorp, nonperforming assets totaled a bit more than 5 percent of total assets. Most banks try to keep their problem loan totals to 1 percent or less.

At the end of the first quarter, the 215 banks regulated by the state Department of Financial Institutions reported holding $2.3 billion in noncurrent loans, or those that are more than 90 days past due. That was 1 percent of the total, but a steep increase from the $1.5 billion on noncurrent loans at the end of 2007.

Even at staid credit unions, problem assets have risen and stood at 0.85 percent of total loans, according to a first-quarter report from the California and Nevada Credit Union Leagues.

Despite the obvious industry turmoil, three new banks are being organized in the region, with one, Vibra Bank in Chula Vista, planning to open its doors this month.

Two others were targeting openings later this year: Gateway Pacific Bank in National City, and Manchester Financial Bank in La Jolla.