Solid loan growth, hardy credit quality, and fatter interest margins produced exceptional first-quarter earnings at some smaller banks.

More broadly, increases in fee income and a careful eye on expenses helped most of these institutions hit earnings targets. Overall, analysts were glad earnings reports, released over the last few weeks, contained few negative surprises.

"This was one of the dullest yet strongest quarters in recent history," said Anthony Polini, an analyst with Advest Inc. in New York. "There were probably fewer earnings surprises than there have been in a long time."

"A lot of the reports are boring this quarter, but boring is good," added Michael M. Moran, a bank analyst with Roney Capital Markets in Detroit. "I couldn't be happier."

Among companies with assets of $10 billion of less, those with strong loan growth were standouts in the first quarter.

Mississippi Valley Bancshares in St. Louis, for example, reported net income of $5.49 million for the quarter-up 23.6% from a year earlier. Per- share earnings of 57 cents beat analysts' consensus estimates by 8 cents, according to First Call.

The $1.4 billion-asset company, which focuses on small-business customers, grew its loan portfolio 15.3% in the year that ended March 31, to $1 billion. Mississippi Valley's efficiency ratio also improved, to 37.80% in the first quarter from 41.33% from a year earlier.

"They epitomize the niche strategy," said Timothy Willi, bank analyst at A.G. Edwards in St. Louis. "They don't let anyone do their jobs better than they do."

Community banks and smaller regionals are having more success than their large competitors in increasing assets, according to Mr. Polini.

"The $10-billion-and-under crowd is holding up better than the larger banks," he said. "They are still benefiting from consolidation that is chasing customers away from bigger banks."

Sun Bancorp in Vineland, N.J., expanded aggressively during the first quarter, opening five branches and buying a mortgage company and two other branches. The $1.5 billion-asset company's loan portfolio swelled 60% in the quarter, to $730 million. Net income increased 34% from a year earlier, to $2.4 million.

UCBH Holdings Inc. in San Francisco reported a whopping 153% increase in net income, to $1.6 million-shattering Wall Street estimates by 13.5%. Earnings at the $2.2 billion-asset company were fueled by a 48% surge in commercial loan originations and a 33% increase in net interest income.

"UCBH's commercial banking initiatives are paying off handsomely," said John M. Kline, analyst at Sandler O'Neill & Partners in New York. "It's one of the cheapest stocks I cover."

Earnings jumped 16%, to $26 million, at City National Corp. in Los Angeles, in its 19th consecutive quarter of double-digit growth. The $6.3 billion-asset company benefited from a 60% spike in construction loans and a 20% rise in commercial loans.

"We've brought in new clients, diversified our loan portfolio, and cherry-picked some of the finest banking talent in California," said Russell Goldsmith, City National's chief executive.

Also in California, new lending helped Greater Bay Bancorp in Palo Alto increase earnings 29%, to $5.1 million. Total loans rose 46%, to $1.1 billion, while nonperforming loans dropped 24%, to $3.9 million.

David L. Kalkbrenner, president and CEO of the $1.8 billion-asset company, credited a crew of lenders whom Greater Bay lured away from Imperial Bancorp, Los Angeles. "If you have the best bankers, you get the highest-quality loans at the best price and at the lowest risk," he said.

"We're handling credit needs of $2 million to $10 million," Mr. Kalkbrenner added. "Most major banks aren't structured to handle those loans, and it exceeds the legal lending limit of the smaller community banks."

Despite an aggressive pursuit of new loans, credit quality appears to be holding steady or improving among smaller banks.

"Every analyst has been waiting for asset quality to go down, but half of the banks I cover are unchanged and the other half are improving," said Wayne Bopp, a bank analyst at Robert W. Baird in Milwaukee.

Gold Banc, a $1.1 billion asset bank holding company in Leawood, Kan., posted net income of $3.1 million for the first quarter, up 171.5% from the same period a year earlier. Nonperforming loans dropped 41% during the quarter to $2.2 million.

One Valley Bancorp of Charleston, W.Va., expanded its loan portfolio 15% from a year earlier, to $4 billion. And nonperforming assets were reduced to 0.24% of total loans, from 0.32%.

Net income at First Virginia Banks Inc. in Falls Church, rose 10%, to $33.6 million, excluding the $10.7 million gain on the sale of its credit card portfolio to MBNA.

The $9.5 billion-asset company attributed the solid quarter to a 15% increase in fee income and a 26% rise in auto lending. First Virginia also reported a 25% drop in net chargeoffs and a 16% decline in nonperforming loans, to $20.2 million. That represents 0.34% of total outstanding loans-a record low.

"We expect a continuing decline in chargeoffs," said Richard F. Bowman, chief financial officer at First Virginia. "It's been a good market for credit quality the past several years."

Finally, banks' bottom lines were boosted by wider interest margins.

"I had expected interest margins to come in flat to modestly up," said Kevin T. Timmons, an analyst with First Albany (N.Y.) Corp. "What we saw were margins modestly to impressively up."

Most smaller banks reduced their cost of funds during the first quarter, following the interest rates cuts of last fall. Many banks are repricing certificates of deposit lower as they are renewed.

"A lot of the companies I'm talking to aren't willing to chase after deposits and pay up for them," said Daniel Cardenas, a bank analyst at Howe Barnes Investments in Chicago.

Lower rates helped $5.1 billion-asset First Midwest Bancorp in Itasca, Ill., improve its interest margin to 4.23%, up 21 basis points from Dec. 31.

In Pennsylvania, $4.1 billion-asset Susquehanna Bancshares saw net interest margin stabilize at 4.28% after declining for eight quarters. That helped the Lititz-based holding company boost net income 5% over last year's first quarter, to $11.7 million.

"Pricing is still stiff on the loan side, but our CDs are coming due and are being repriced," said Drew K. Hostetter, chief financial officer. "We can finally bring our cost of funds down as quickly as our loan rates."

Of course, not every smaller bank did well in the first quarter.

Keystone Financial Inc., with $6.8 billion of assets, for example, earned 42 cents per share for the quarter, missing analysts' consensus estimate by 5 cents.

Harrisburg, Pa.-based Keystone, which has been under pressure to sell from activist shareholder Seymour Holtzman, was hurt by charges stemming from a cost-cutting campaign that includes merging its seven bank charters.

"While a restructuring of the magnitude experienced by Keystone has a negative short-term impact on operations, we are confident of its long-term benefits," said Carl L. Campbell, the company's chairman and chief executive officer.

But even without those charges, net income fell 13% from last year, to $21 million for the quarter. What's more, Keystone's loan portfolio shrank 4.5%, to $4.4 billion, in the first quarter.

A number of West coast banks also ran into trouble.

Two Washington State banking companies were plagued by soaring expenses. At Columbia Banking Systems Inc. in Tacoma, earnings dropped 13%, to $2 million, from the same period in 1998. The construction of an operations center and two branches in new markets, as well as technology investments, drove the $1.1 billion-asset company's expenses up 32%.

Cowlitz Bancorp in Longview saw earnings plummet 77% to $102,000 in the first quarter from the same period last year. The $175.5 million-asset company attributed the dismal quarter to a 28% surge in expenses resulting from a new loan production office and costs associated with a specialty finance company acquisition. Loan-loss reserves soared after Cowlitz charged off a $348,000 loan.

A pair of California banks-Silicon Valley Bancshares, Santa Clara, and GBC Bancorp, Los Angeles - also were stung by soured loans.

Silicon Valley's nonperforming loans skyrocketed 160%, to $52 million. The $3.9 billion-asset company's earnings rose 2.6%, to $7.8 million.

GBC, which saw its net income fall 1% to $6.6 million, was stung by $31 million nonperforming loan for the construction of a Las Vegas casino. The $1.7 billion-asset company said it would have met street estimates if not for the bad loan.

"It's been some time since we've seen negative reports on nonperforming loans," said Steve Didion, an analyst at Hoefer & Arnett in San Francisco.

Looking ahead, many analysts are questioning how long credit quality can be preserved.

"We are still in la-la land in terms of loan losses," said John B. Moore, senior vice president with Wachovia Securities Inc. in Charlotte, N.C "It's been six years now since we have seen any significant losses. Eventually, they will come."

Advest tracks nonperforming loans, and Mr. Polini said they could increase during the second quarter for the first time since 1991.

"Loan growth eventually is going to have to slow, and credit quality will have to worsen," he said. "But I would have said the same thing a year ago."

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