Exploding demand for loans fueled a banner second quarter for many community and regional banks.

With year-2000 expenses out of the way for most banks, analysts are predicting even stronger earnings in the second half.

"The economy keeps chugging along, and it continues to create significant loan demand," said James Ackor, an analyst with Tucker Cleary Capital Markets in Portland, Maine.

Mr. Ackor said nearly every company his firm follows reported loan growth of 8% to 12% from a year earlier. Wayne R. Bopp, an analyst at Robert W. Baird & Co. in Milwaukee, said 13 of the 16 midwestern banks he covers beat his estimates for the quarter.

Still, the news was not all good for community and regional banks.

Mr. Bopp said that while fundamentals for community banks have improved, the stock prices of those he follows are 20% below their 52-week highs.

"Things couldn't be better, but prices have gotten lower," Mr. Bopp said. He blamed the drop on a reduced premium being paid for banks involved in mergers and acquisitions.

Nevertheless, the loan growth-coupled with strong asset quality- impressed analysts.

They attributed the growth not only to the economy, but also to smaller banks' willingness to lower rates to keep pace with bigger ones.

"Some of the community banks that have been very conservative are becoming more flexible on pricing," said Collyn Bement Gilbert, an analyst with Ferris Baker Watts Inc. in Baltimore. "These banks are so dependent on loan growth to drive earnings."

"Little banks realize that if they want to play, they have to put some loans on the books at lower yields," Mr. Ackor added. "If they don't, someone else will."

Webster Financial Corp. in Waterbury, Conn., saw loan originations grow to $475 million, up 13% from the 1998 second quarter. The thrift company's commercial loan portfolio nearly doubled during the last year, to $111.5 million.

Webster, with $9 billion of assets, earned $23.2 million, compared with $9.4 million in the second quarter of 1998.

Another top performer was Brooklyn, N.Y.-based Dime Community Bancshares. Its loan portfolio grew by $437 million from the second quarter of 1998, to $1.3 billion. Net income rose 52%, to $19.9 million. It was the $2.2 billion-asset thrift company's best quarter since it went public three years ago.

At a time when many super community banks are combining charters to cut costs, Mercantile Bankshares of Baltimore bucked the trend and still posted a 6.4% increase in net income.

The $7.6 billion-asset company, owner of 21 banks in three states, reported net income of $38.9 million and finished in the top five of Salomon Smith Barney's ranking of large-cap bank stocks.

Analysts praised Mercantile, which posted a 47% efficiency ratio for the quarter, for keeping a lid on expenses. They also credited the company with resisting the urge to diversify beyond its core trust and basic banking businesses.

"Mercantile has not strayed from the mission the company established in the early 1900s," said Ms. Gilbert. "There is something to be said for having a focused mission and sticking to it."

St. Petersburg, Fla.-based Republic Bancshares, under close scrutiny by analysts, reported encouraging returns.

After losing $21 million in the fourth quarter of 1998, the company has posted profits in two straight quarters, earning $3 million in the second.

The $2.6 billion-asset Republic took a beating last year when secondary- market demand for its mortgage loans abruptly dried up. It has since shuttered its once-thriving Flagship Mortgage subsidiary, costing nearly 600 jobs.

Christopher J. Parker, an analyst with Ryan, Beck & Co. in Livingston, N.J., said he was "pleasantly surprised" by Republic's earnings, noting that, at 26 cents a share, the company beat his estimate by 6 cents. But it was not enough for him to upgrade the stock from a "hold."

"It is not quite clear if this quarter is false hope or the emergence of a new and more profitable institution," Mr. Parker explained. "Until that question is answered, we expect to sit on the sidelines."

Earnings were up 21.4% at $1.5 billion-asset Mississippi Valley Bancshares of St. Louis, to $5.7 million. By June 30 the loan portfolio was up 16.6% from a year earlier.

"They are probably the one bank that I cover that I view as a standout," said Tim Willi, an analyst with A.G. Edwards & Sons Inc. in St. Louis. "They had good loan growth and an excellent margin."

First Midwest Bancorp of Itasca, Ill., reported record second-quarter net income of $17.9 million-an 8.5% increase from 1998. The diluted per- share earnings of 63 cents beat Mr. Bopp's estimate by 3 cents.

First Midwest, with $5.2 billion of assets, said its net interest margin increased to 4.42% from 4.17% a year earlier.

Analysts praised many community and regional financial institutions for keeping finances in check. Mr. Bopp added that if the economy continues to flourish, smaller banks are likely to enjoy even stronger profits in the second quarter as they reduce expenses related to fixing the year-2000 computer bug.

The slowdown in the agricultural economy did hurt some midwestern institutions.

Bremer Financial Corp. in St. Paul reported net income of $8.4 million, a 14.8% decrease from the second 1998 quarter. The $3.8 billion-asset company attributed the drop in part to a $1.8 million increase in loss provisions relating to crop prices

Ag loans represent 20% of Bremer's portfolio.

Southern California's blistering economy generated strong quarters for many of the region's banks, including Los Angeles-based City National Corp.

The $6.3 billion-asset company reported jumps of 86% in construction loans and 12% in all loans from a year earlier. Meanwhile, a brisk trust and investment business helped boost fee income by 25%, to $21.7 million.

As a result, City National's earnings climbed to $26.1 million, or 55 cents a share, compared with $23.6 million, or 49 cents, a year earlier.

At East West Bancorp in San Marino, Calif., quarterly net income skyrocketed 85%, to $7.1 million.

The $2 billion-asset company, which caters mainly to Chinese-Americans, attributed the gain to commercial loan growth and fee income from trade finance. Loans outstanding grew by 28%-including a whopping 160% jump in construction loans-while fee income increased 79%, to $4.2 million.

"We are picking up steam in the Chinese community and mainstream customers from the merger fallout," said Dominic Ng, chairman and CEO of East West.

At PFF Bancorp in Pomona, Calif., net income rose to $6.4 million, or 47 cents a share, from $4.3 million, or 28 cents. Loan originations rose by a third, to $254.7 million.

Among the pleasant surprises of the second quarter was Silicon Valley Bancshares in Santa Clara.

Plagued by bad loans for much of the past year, the $4.1 billion-asset company said nonperformers fell by 9%, to $47 million, from March 31 to June 30, and loan losses were down 33%, to $2.1 million.

Net income jumped to $9 million, or 43 cents per share, compared to the $8.2 million, or 39 cents, in the second quarter of 1998.

The performance prompted First Security Van Kasper in San Francisco to raise its 1999 earnings-per-share estimate by 10 cents, to $1.75 per share.

Still, John C. Dean, president and chief executive officer, said Silicon Valley Bancshares is hardly ready to celebrate.

In a conference call with analysts and reporters, he said, "We're pleased with the results, but we still have a lot of work to do."

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