Lew Stone is a strong believer in the survival of the average community bank. But he isn't satisfied with just being average.

Rather than rely on old-fashioned interest income, branches, and personal service, Mr. Stone has led Goleta National Bank on a fee-based path, taking technological and product roads less traveled by most community banks.

The 54-year-old president of Goleta says the route to profits for small banks no longer lies in traditional community banking. "If you're going to be able to survive today, you have to look at what you have to be five years from now," Mr. Stone said at his office here, north of Santa Barbara. "Just being a community bank franchise won't generate the kind of returns that are possible."

The $86 million-asset bank has spent the past few years-and millions of dollars-investing in the equipment, staff, and training essential for delivering its sophisticated products.

Although its expenses soared-salaries alone rose $1.5 million last year- so have the results. Last year, the bank's "continuing appetite for fee income" produced $6.5 million in fee revenue alone, covering 76% of its expenses. Ultimately, Mr. Stone wants to cover all expenses with fees.

Noninterest income equaled 8.98% of average assets last year, among the top 20 in the nation among community banks, according to Sheshunoff Information Services. And it's more than 7 percentage points higher than in 1993.

That helped Goleta earn $1 million last year, chalking up returns on assets and equity of 1.40% and 13.48%, respectively, while generating investor interest. Goleta's stock was listed on the Nasdaq National Market last November.

"They're one of the most dynamic small banks I've ever seen," said Hans Schroeder, bank analyst at Torrey Pines Securities in San Diego. "What makes them so dynamic is their innovative and creative ways of generating fee income, especially among small banks. You usually see that with larger banks."

In fact, Mr. Stone's background is in both large and small banks. He started his career in the '70s as a lender at Imperial Bank and then a credit administrator at Capital Bank in Downey. He then was branch manager at Chartered Bank of London and Union Bank in Los Angeles, subsidiaries of Standard Chartered Bank.

Before starting Goleta in 1989, he worked at start-up Bank of the Oaks and founded Conejo Valley National Bank in 1983. He sold Conejo in 1986 to First Interstate Bank.

Now Mr. Stone is setting out on his latest adventure, joining forces with $100 million-asset Los Robles Bancorp, Thousand Oaks, to form Community West Bancshares. The company will be led by Mr. Stone will be president. and Robert Hamilton, president and chief executive of Los Robles, who will be president and executive vice president, respectively, of Community West.

The goal of the multibank holding company is to draw other banks into the fold, allowing them to maintain their individuality and reach more customers with their products. Meanwhile, they're spreading out the costs and sharing even more fee-generated wealth. The merger is expected to close in the fourth quarter.

Mr. Stone's search for fee income reflects one solution to the challenges facing many small banks.

"The majors have really significantly penetrated the small-business market in the last 18 months," Mr. Stone said. "That was our niche. Community banks can't thrive the way they used to unless they do this."

"These community banks can't survive on their own because of the cost of technology," Mr. Schroeder said. "They're going to have to join together. This way they're able to keep their positions and be part of a team."

Mr. Stone developed his strategy for Goleta through old-fashioned trial and error and "fear of failure." Just six months after Goleta opened its doors in August 1989, he said, it became apparent to him that the bank couldn't survive in the small market with just loans and branches.

That revelation led them to discover service charges, government lending programs, and niche banking through technology.

"My fear of competition drove that," he said. "I felt that in order to compete, those were the areas I would have to concentrate in in order to get the return for shareholders."

Goleta's success comes from fees generated from what Mr. Stone calls the bank's five "profit centers": Small Business Administration loans, Department of Housing and Urban Development Title 1 home-improvement loans and a "lookalike" product with a higher maximum, accounts receivable, mortgage banking, and electronic transactions.

To help generate assets, the one-branch bank has seven loan production offices in Ventura, Santa Maria, Fresno, Bakersfield, Santa Ana, Santa Barbara, and Las Vegas. The bank spends about $50,000 per month on direct mail, television, and radio advertising for loans in both California and Nevada, and has developed a high-tech telemarketing program to take customer calls responding to the ad campaigns.

Goleta has also become active in accounts receivable financing statewide and has a mortgage banking operation that processes different loans for 50 to 70 banks around the country for a fee.

Finally, the bank has taken advantage of technology to offer products unusual for its size. Goleta was one of the first banks in its area to offer on-line cash management for business customers. And despite its small size, the bank has an unusually high volume of electronic business, with 25,000 automated clearing house transactions per day.

"The technology allows us to do much more than we would otherwise be able to do from our limited area," Mr. Stone said.

But while Goleta has benefited greatly from the fee-based philosophy-the bank grossed $1 million in fee income just in March-the costs have been high. Its ratio of noninterest expenses to average assets was 17th highest among community banks in the nation, and salaries as a percentage of average assets was fourth highest.

The Community West Bancshares plan-the holding company is Los Robles' but Goleta's management team is running the show - is designed to address those costs by leveraging them across a larger asset base.

"What we are is the sum of a bunch of parts," Mr. Stone said. "We wanted to give any community bank looking at coming into the fold a lot of bang and an opportunity to make dollars."

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