Credit scoring and discounting by the biggest banks in California are making life difficult for small-business bankers at smaller institutions.

Community bankers in the state say they are finding it increasingly difficult to compete in that specialty against Wells Fargo & Co., BankAmerica Corp., and big thrift institutions.

"Small bankers are crying now a little bit more than they have in the past," said Patrick Kilkenny, president and chief executive officer of National Bank of the Redwoods, Santa Rosa.

He and some of his peers are saying they must work harder to make new loans but they earn less on them.

It is not yet a debacle. Many community bankers boosted outstanding loans by more than 20% last year.

But the California Bankers Association said the threat from larger institutions is real. New loans for less than $100,000 made by Wells Fargo's and BankAmerica's California banks increased 66% from June 1996 to June 1997. California thrifts increased their commercial loans nearly 30% in the first nine months of 1997, to $2.2 billion, the association said.

The frequency of top banks' "marketing efforts has increased, and they're pretty aggressive," said Bart Hill, president and chief executive officer of San Joaquin Bank in Bakersfield, Calif. "The margins in this segment have narrowed."

Robert Longatti, executive vice president and chief credit officer at Regency Bank, Fresno, said a large competitor trying to woo an established business customer might offer to reduce interest rates on a credit line to prime plus 0.5%, from prime plus 1.5%.

Regency Bank would be forced to reduce its rate to prime plus 1% to maintain a relationship, Mr. Longatti said. Small-business customers are willing to pay slightly higher rates for better service, he said.

"When we go to see a potential customer, we realize we are going up against at least two or three other banks," he said. "We also realize that the major banks are calling on our best customers."

Other community bankers said good service is the key to keeping customers. Maintaining ties with commercial real estate brokers, who provide referrals and help attract new customers, is also important, they said.

But the community banks are not winning as many prospects as they would like.

"We haven't lost many deals, but anything you lose has an impact on earnings," said Deborah Meekins, president and chief executive officer of Sonoma National Bank in Santa Rosa.

Mr. Kilkenny said competition from the majors has led Bank of the Redwoods to increase its focus on mortgage brokering and subprime lending.

"We haven't gained any market share in the last year in small business, which was our primary focus," he said. "If we hadn't diversified," earnings would have been affected.

A large bank will sometimes steal away a small-business customer before lenders at Bank of the Redwoods even realize this entrepreneur needs to borrow, he said.

"It could be one of our deposit customers," he added. "If we haven't asked about their needs, before we know it, they are gone."

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