Community banks' earnings momentum continued in the fourth quarter, despite two rate cuts by the Federal Reserve Board and strong competition for loans.

In a quarter when some of the biggest banks were hit by merger-related charges and international exposures, earnings in the community sector "were quite good, even surprisingly good," said Hope Willard, an analyst with J.C. Bradford & Co., Nashville.

Though smaller banks' performance remains more closely tied to interest margins, "they held up O.K.," Ms. Willard said.

Higher loan volume and fee income helped earnings meet-and in many cases exceed-analysts' expectations.

"Banks found decent loan volume without having to stretch themselves out," said James R. Bradshaw of Pacific Crest Securities in Portland, Ore. Twelve banks he follows-including SierraWest Bancorp of Truckee, Calif., and Sterling Financial Corp. of Spokane, Wash.-beat earnings estimates.

Greater Bay Bancorp of Palo Alto, Calif., more than doubled profits, to $5 million, with loan volume 28% higher in the fourth quarter than in the comparable period of 1997.

Going after borrowers turned off by big-bank mergers helped Irwin Financial Corp., a $1.9 billion-asset holding company in Columbus, Ind., to boost fourth-quarter net interest income 13%. Net income rose 4%, to $6.3 million.

"Our strategy is to go into markets where there has been some bank consolidation," said Gregory F. Ehrlinger, Irwin Financial's treasurer. "We've had very good success with that."

The lower rates made it easier to make new loans, said Debra L. Lee, chief financial officer of $2 billion-asset Triangle Bancorp in Raleigh, N.C. Of course, the customers were listening to her competitors at the same time.

"If we are not watching carefully, just as much of our business is sneaking out the back end on us," Ms. Lee said.

Some observers warned that loan growth for the sake of profit increases can be risky.

Chris Hargrove, president of Professional Bank Services Inc. of Louisville, Ky., said loan-to-deposit ratios at many community banks increased during the fourth quarter, as banks scrambled to maintain interest income.

"What we are seeing is banks making the same amount of money, but taking on more risk to do it," Mr. Hargrove said.

James Ackor, analyst with Tucker Anthony Inc. in Portland, Maine, said, "Eventually, the volume has to slow."

But analysts said that while there is reason for concern about credit quality, there is little actual evidence that community banks' underwriting standards are slipping.

"We keep waiting for credit quality to drop," said Anthony Polini, an analyst at the Advest Group Inc. in New York. "So far, we've seen little change."

At many banks, reductions in interest income were offset by fees.

At $1.8 billion-asset First Indiana Corp. in Indianapolis-typical of institutions its size-noninterest income grew faster than interest income. Fourth-quarter fee income rose 18.1% from a year earlier, to $6.1 million.

The concentration on fee income "really saved the banks this quarter," said Daniel Cardenas, bank analyst at Howe Barnes Investments in Chicago.

The mortgage refinance boom contributed to that, as banks generally collect fees when they sell fixed-rate loans on the secondary market.

Brenton Banks in Des Moines, for example, improved its fee income for the last quarter by 32%. The $1.9 billion-asset company's fourth-quarter earnings were $5.3 million, up 22%.

Brenton's strategy of cross-selling fee-based brokerage products to existing customers is starting to pay off. Income from brokerage commissions grew by 11% last year. "We don't want to give up on the core bank, but growth has to come from somewhere else," said chief financial officer Steven T. Schuler.

Analysts said small banks have learned their fee-income lessons from larger competitors.

"They realize they need to diversify their revenue streams," Mr. Cardenas said. Cross-selling of investment products, for example, "allows you to tie up your customers a little bit more."

Refinancings may have helped banks such as Brenton, but they spelled trouble for Calumet Bancorp in Dolton, Ill.

Calumet suffered a $648,000 loss during the fourth quarter from an investment in a loan servicing partnership. The partnership was hurt because it acquired servicing rights to loans that were being paid off early when customers refinanced mortgages at a lower rate.

The loss depressed Calumet's earnings for the quarter, which fell 52%, to $1.2 million. The loss ultimately caused Oak Park, Ill.-based FBOP Corp. to call off its deal last month to buy $479 million-asset Calumet for $111.6 million.

Not all banks were able to adjust to interest rate cuts.

Western Bancorp is scheduled to report its earnings today. But the $3 billion-asset company said in late December that its fourth-quarter profits would fall 5% short of analysts' estimates.

"It goes without saying that we wouldn't like to see another rate cut," said Arnold C. Hahn, chief financial officer at Western Bancorp in Newport Beach, Calif.

At Premier Bancshares in Atlanta, more than half the loans are tied to the prime rate. With the Fed moves, Premier's net interest margin for the fourth quarter fell to 4.44%, versus 4.99% a year earlier. Earnings at the $1.5 billion-asset company fell in the last quarter by 16%, to $3.8 million, though some of that was due to merger-related charges.

Darrell D. Pittard, chief executive officer, said Premier did not cut its deposit rates because it feared losing customers. Instead, he intends to lower rates gradually, saying it will take Premier about four months to restore its 5% margin.

Alfred B. Whitt, president of $2.9 billion-asset F&M National Corp. in Winchester, Va., said shrinking margins were a problem even before the Fed cuts. With the lending environment at its most competitive in years, "We were already quoting rates under prime when the cut happened," Mr. Whitt said.

F&M earned $9.6 million in the fourth quarter, a $1.6 million increase from the 1997 period, but its net interest margin fell to 4.66%, from 4.85%. Mr. Whitt is telling presidents of F&M's nine bank subsidiaries that the minimum is 4.5% and "if it gets close, they need to look at cheaper funds than deposits," such as borrowing from the home loan bank.

Thinning margins, higher loss reserves, and a falloff in fee income are leading some analysts to predict the end of a five-year earnings juggernaut.

"Community banks won't see the same rate of earnings growth in the years ahead," said Eric D. Hovde, president and chief executive at Hovde Financial Inc., a Washington investment banking firm.

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