Newcomers and S corporations dominate American Banker's annual ranking of the nation's most profitable community banks.

Nearly 60% of the top 75 performers among those with $100 million to $2 billion of assets-including five of the top 10-are new to the list this year. So are nearly half of the 50 most profitable with less than $100 million of assets.

The rankings, published each June, measure profitability by return on average assets in the previous year. To qualify, a bank must also have made money in the two years before that. (Tables begin on page 9.)

Topping the list of larger banks, with a whopping 7.24% ROA, was First National Bank of Keystone (W.Va). The $1.1 billion-asset bank, which focuses almost exclusively on residential lending, moved up from third last year.

Tri-State Bank and Trust Co. in Haughton, La., headed the small-bank list for the second consecutive year, returning 5.41% on its assets in 1998.

The highest-ranking newcomer to the list, Kentucky Farmers Bank in Catlettsburg, made the bulk of its money by investing its deposits in securities such as accrual bonds.

The $120 million-asset institution placed third on the list of larger banks, with an ROA of 4.6% in 1998.

"Our shareholders believe we can get the best returns investing in securities, so that's what we've done," said chairman and chief executive officer Charles M. Russell.

Another newcomer, Bank of San Francisco, scored a banner 1998 by boosting its fee income 10% and increasing loan volume in booming Northern California, said president John F. McGrath. The $140 million-asset bank placed sixth among larger community banks, with an ROA of 3.93%.

Other top performers took different routes to profitability.

First Security Bank in Sleepy Eye, Minn., cracked the top 10 for the second straight year by keeping its overhead low. The $109 million-asset bank had an efficiency ratio of 36.43% in 1998, well below the 61.33% average for banks its size.

"We have a lot of experienced people working here who can handle a lot of traffic," said president Mark R. Eifert.

Jackson (Wyo.) State Bank converted to a subchapter S corporation in early 1998-and bettered its ROA by nearly 50%. The $361 million-asset bank was ranked 13th among large community banks, with an ROA of 3.13%

Nearly 65% of the profitability leaders among large community banks and 83% of those among small ones are S corporations.

That was no surprise to Jerry W. Rankin, president and CEO of Jackson State Bank.

Banks may convert to S corporation status if they have fewer than 75 shareholders. Because the shareholders carry the tax burden, S corporation banks pay no corporate income taxes-a saving that can boost earnings by as much as 40%.

"You're not really comparing apples to apples," Mr. Rankin said.

In fact, the two states with the most S corporation banks-Texas and Minnesota-had the most banks on this year's rankings. Texas had 17 banks on the two lists, Minnesota 11.

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