Driven mainly by robust loan demand, third-quarter earnings were strong at most of the nation's community banks.

But with core deposits shrinking, analysts say community banks could be nearing the end of their record run.

"This is about as good as it's going to get," said Robert C. Ollech, an analyst at Principal Financial Securities Inc., Milwaukee.

Monday's 554-point stock market plunge further clouded the future. While community banks may gain deposits as investors retreat from the market, Monday's selloff left some community bankers uneasy.

"I don't consider this good news," said Richard C. White, president and chief executive officer of Community Bancorp in Derby, Vt. "When this happens, it weakens consumer confidence."

Still, this week's volatility can't tarnish what was a banner third quarter for community banks.

Gerard Cassidy, an analyst for Tucker Anthony Inc., Portland, Maine, estimated that 95% of the earnings reports he has seen came in at or above what he expected for the quarter.

A strong lending environment from coast to coast drove much of the growth. Greater Bay Bancorp, Palo Alto, Calif., reported that net income increased 77% over the same three-month period in 1996, to $2.4 million. Those of Unity Bancorp in Clinton, N.J., jumped 65%.

The reason: Both Greater Bay and Unity reported net loan increases of more than 40% over the same period in 1996.

Increased loan demand tells only part of the story, however. At Quaker City Bancorp, Whittier, Calif., the difference between $1.53 million of net income in the quarter ended Sept. 30 and a $1.27 million net loss a year earlier can be explained by lower insurance premiums.

Quaker City, like most savings and loans, was hit last year with a one- time fee to recapitalize the Savings Association Insurance Fund.

San Diego's Bank of Commerce, a leading Small Business Administration lender, posted record earnings thanks mainly to demand for SBA loans in both the primary and secondary markets.

The $470 million-asset bank, which reported an earnings increase of 118%, to $2.08 million, recently began selling a larger portion of its SBA loans on the secondary market.

"We believe this strategy achieves a good balance between generating current income and building a recurring revenue stream," said chairman and chief executive officer Peter Q. Davis.

Several banks cited expansion-either new branches or bank acquisitions- as the source of higher earnings.

Midsouth Bancorp, Lafayette, La., posted a 74% earnings increase. C.R. Cloutier, president and chief executive officer, said seven branches that opened since the beginning of 1995 are beginning to show profits.

Acquisitions by regional and superregional banks also helped boost earnings at smaller independent banks.

Pioneer Citizens Bank, Reno, Nev., saw earnings soar 43%, to $4.3 million, partly because the bank has won over many customers of banks acquired by Wells Fargo. "The out-of-state policies and procedures are harder to sell in Nevada," said Pioneer president and chief executive officer William E. Martin.

Good timing and $10 million in start-up capital helped Harbor Bank of Newport News, Va., turn a profit after just 15 months. This summer, as Harbor was pitching itself as community-owned, two of its main Virginia competitors, Signet Banking Corp. and Jefferson Bankshares, announced they were being acquired by North Carolina giants First Union Corp. and Wachovia Corp.

Despite record-shattering earnings nationwide, analysts remained concerned about liquidity.

Wayne Bopp, a bank analyst at Robert W. Baird & Co., Milwaukee, said all but three of the Midwest banks he follows reported that deposits decreased in the third quarter. Meanwhile, demand for commercial loans soared.

At First Indiana Corp., a $1.5 billion-asset holding company in Indianapolis, deposits fell 2.6% to $1.1 million while loans increased by 5.2%. National City Bancorp., a $954 million-asset company in Minneapolis, reported a 10.1% decrease in deposits and a 12.8% increase in loans this year.

Still, both banks posted strong overall earnings. First Indiana's earnings increased 18% to $4.3 million over the same period in 1996. National City's earnings were up 26% during the third quarter to $4.3 million.

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