The smallest community banks in California are less profitable than their counterparts nationwide.

In last year's first nine months, community banks in California with less than $100 million of assets returned an annualized 0.59% on assets, according to the Federal Deposit Insurance Corp. The nationwide figure for banks of similar size was 1.25%.

Even excluding the 13 banks formed in California in 1998, return on assets was a paltry 0.76%. Return on equity for California's smallest banks was 4.53%, versus 11.19% for similar-size banks nationwide.

Bankers and industry observers attributed the low ratios to fierce competition for loans in California, tightening loan spreads, increased loan-loss provisions, and lack of fee income.

"We're struggling to put loans on the books," said Craig Collette, president and chief executive officer of Marathon National Bank in Los Angeles, with $78 million of assets.

The story is similar for the state's biggest banks. According to a "state of the industry" report released this month by the California Bankers Association, loans at the state's three biggest banks-Bank of America, Wells Fargo and Union Bank of California-increased at a 2.2% annual rate in the first nine months of 1998.

The figure was 15.2% for banks with less than $10 billion of assets.

One problem plaguing the smallest banks is high expenses. California's cost of living is generally higher than that of other states. As a result, efficiency ratio at California's community banks is 78.46%, compared with the national average of 65.01%, for banks with less than $100 million of assets.

"It is a challenge for small community banks to achieve efficiencies," said William B. Waddell, president at Granite State Bank in Monrovia, Calif. "Our product is customer service."

Banks with less than $100 million of assets make up about 38% of California's banks.

Despite weak profits, the state's smaller banks are growing. As of September their median asset growth rate was 12.69%, compared with 7.84% for all U.S. banks, according to Sheshunoff Information Services.

Overall, industry observers said, those banks with top management teams will prosper.

"The future is bright for some," said Michael B. Abrahams, bank analyst at Sutro & Co. in San Francisco. "Others have weak management and board of directors."

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