The most profitable community banks are putting profits to use faster than their colleagues do, according to American Banker's annual profitability survey.

Among small community banks - those with less than $50 million of assets - the 100 top performers grew 70% faster in 1993-95 than the average for banks that size. And the 100 profitability stars among large community banks (up to $1 billion of assets) grew 37% faster than the average for the size category.

The two high-performing groups also increased assets fast in the three- year period - about twice as fast as the comparable 1993 group did in 1991- 93. And last year their average returns - on assets and equity - remained twice as high as those for all banks of similar size.

Overall, banks in both size categories earned about as much in 1995 as in 1994, and grew about as fast.

The survey shows that though many analysts and other observers remain skeptical that high-performing banks truly serve their communities, many such banks appear to be putting the new capital to use through asset expansion, including mergers.

"When you look at the profitability of the high-performance banks, it certainly sets targets for subperformers to reach for," said James Moynihan, senior vice president of Advest Group in Boston. "If one company can do it, another one can, too."

The annual survey by American Banker ranks the top 100 large banks and top 100 small banks by their return on assets. Only those profitable for three years in a row were included in the survey.

But although many of the 200 banks in the two surveys showed returns on assets of upward of 2.25%, the true test of high performance is not simply superior earnings, but how fast the institution is growing, said Arnold Danielson, chairman of Rockville, Md.-based Danielson Associates.

For one thing, unusually high earnings are often boosted temporarily by one-time events, while real growth is needed to sustain such high results, he said. Also, he was skeptical that the banks at the top of the performance list were really trying to grow and serve their communities, as opposed to just raking in the bucks to please shareholders and analysts.

"Very seldom do you have an institution that's both growing and providing good services having that type of return," he said of some unusually high numbers at the top of the survey. "They tend to be institutions who cut their costs to the bare bones, don't pay much for deposits, have a lot of capital, and don't grow."

Some of the high-profitability numbers reflect asset growth through mergers. As the banks buy others, consolidate the franchises, and lay off staff, the acquisitions eventually boost their earnings, sometimes significantly.

In many other cases, however, niche banking has proven to be the key to community bank profitability, even if the banks aren't growing much.

For example, Avery County Bank, a $47 million-asset institution near the Tennessee border in North Carolina, relies on the Christmas tree and ornamental shrubbery industry, as well as tourism, for its income.

"That's what people grow instead of cabbage, beans, and cotton," said the bank's president, Martha Guy. "We've been here the longest, so a lot of people have stuck with us."

The bank also keeps costs down by having only one office, and has no plans to expand in the low-growth, sparsely populated area.

Avery County Bank had a 3.56 ROA in 1995, third on the list.

And American National Bank in Parma, Ohio, which topped the small-bank list with a 3.75% ROA, focuses on small-business lending; it has no retail loan customers. Half of its loans are guaranteed by the Small Business Administration and are sold on the secondary market - a strategy that keeps asset growth down but profits high. The bank is actually owned by small- business owners.

Richard E. Wise, American National's president and chief executive, questioned the wisdom of quick growth.

"If you're growing rapidly, it's harder to grow your ROA, because your assets are probably increasing a lot faster than your income," said Mr. Wise. He says his studies of profitable banks show niche banking to be key.

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