Community banks are on a roll.

A review of third-quarter earnings reports suggests that they're performing considerably better than their bigger rivals. In fact, many have racked up eye-popping profit gains.

The nation's smallest banks have steadily gained customers from larger banks undergoing mergers, according to bankers and analysts. As a result, many small banks have outpaced the rest of the industry in loan growth.

And lacking the credit card exposure of their larger competitors, small banks have been spared the writedowns that have dampened earnings at many of the nation's biggest institutions.

"We had good, strong loan demand this quarter," said Donald R. Mengedoth, chief executive of Community First Bankshares in Fargo, N.D., whose upper Midwest and Mountain States loan portfolio grew by 11.4% in the last year.

Reports from smaller banks have been "across-the-board excellent," said Steven J. Didion, analyst at Hoefer & Arnett in San Francisco. "We've been seeing improvements in credit quality, stronger margins, and loan growth."

"This is their time," said Michael Abrahams, a Sutro & Co. bank analyst: "Community banks will have plenty of opportunities to snag customers."

Such assessments, and a sampling of community banks considered bellweathers for their regions, suggest that even the most phenomenal earnings increases were largely driven by core operating performance, as opposed to the one-time gains that characterized community bank earnings in the early '90s.

By contrast, large banks are generating their earnings growth mostly by cutting costs.

Jerry Jones, managing director of Duff & Phelps in Los Angeles, said small banks are reaping the advantage of lower insurance premiums and strong interest margins, while increasing fee income and keeping costs down.

In the Northeast, the rash of big-bank mergers last year yielded extra benefits for the region's community banks.

Barry B. Davall, president and chief executive of Community First Banking Co. in Tinton Falls, N.J., said its earnigs rose 66% thanks to new business from rival Central Jersey Bancorp, which was acquired by National Westminster's New Jersey unit. The Natwest unit was subsequently bought by Fleet Financial Group, Providence, R.I.

"That's fueled most of our growth," Mr. Davall said.

Thomas R. Venables, president and chief executive officer of Grove Bank in Chestnut Hill, Mass., attributes his bank's 24% jump in earnings to higher-than-normal loan demand; the bank's loan portfolio grew 12% in the year ended Sept. 30.

Chip Wittman, a bank analyst at Wheat First Butcher Singer in Richmond, Va., said community banks in the Middle Atlantic states generally saw a 10% to 12% growth rate, even with the special deposit assessments to recapitalize the Savings Association Insurance Fund, the one blot to community banks' and thrifts' bottom lines.

Mr. Wittman said banks focusing on commercial lending are showing double-digit growth, while those focusing on consumer lending aren't having as much success.

Aided by a strong economy, community banks in the central United States reaped strong loan and asset growth by keying on niche markets.

Sterling Bancshares, Houston, has targeted owner-operated businesses as its niche, a strategy that has translated into compounded growth of 22% over the past five years.

The banking company earned $2.8 million in the quarter, up 22% from the year-earlier period. Internal growth swelled Sterling's loan portfolio 27.2% to $468.2 million; assets shot up 19.2% to $726.5 million.

"The Houston economy has been generating a lot of business for us," said Seth A. McManus, chief financial officer for Sterling. It also helps that many south Texas community banks are being gobbled up by the likes of Compass, Norwest, and Banc One.

Strong consumer and real estate loan growth drove up third-quarter earnings at Community First, Mr. Mengedoth said. Net income jumped 11.8%, to $7.3 million, from the year-earlier period; loan portfolios inflated 11.4%, to $1.6 billion.

On the western front, community banks are showing strong earnings growth as the economies of many western states continue to flourish.

SJNB Financial Corp., San Jose, Calif., reported a 39% increase in net income for the third quarter over the same period last year, as loans increased $20 million from last December to $191 million. Return on assets was 1.61%, while return on tangible equity was a whopping 20.67%.

"The economy overall is strong here in Northern California, and I think we're just getting our share of the growth," said James R. Kenny, president and chief executive. "It's kind of refreshing after some of the problems of the past."

Nearby Civic Bancorp in Oakland reported a 20% increase in earnings to $1.05 million for the quarter, yielding returns on assets and equity of 1.59% and 13.19%.

In other states, Northrim Bank in Anchorage earned $585,000, up 10% from the same quarter in 1995. Officials attributed the increase to asset growth, including a 29% rise in loans from September 1995.

Even banks in lagging Southern California, the last region to pull out of the recession, have shown significant improvement after several years of struggles and losses. City National Corp., at $3.9 billion in assets the largest independent in Southern California, reported a 34% increase in earnings for the quarter to $17.8 million.

Sutro's Mr. Abrahams said such performance is a mark of not only the improving economy, but also the customer fallout from the First Interstate/Wells Fargo merger, which "helped immensely."

In other sectors, a strong agriculture market helped First Farmers and Merchants State Bank of Grand Meadow (Minn.) rake in 40% earnings growth during the third quarter. The bank posted $29,000 in earnings during the three months ended Sept. 30.

"It looks like another good year for agriculture," said Ray A. Gomer, president of the $22.3 million-asset bank, which caters to corn and soybean farmers in southwestern Minnesota.

One glum spot was the slow recovery in Hawaii, which hindered CPB Inc. in Honolulu. Earnings rose by only 1.2% to $3.8 million, while total assets dropped 2.7% to $1.36 billion.

As expected, however, many of the thrifts across the country are reporting lower earnings or even losses because of the one-time assessment to recapitalize the Savings Association Insurance Fund.

"The only factor of a negative impact on earnings was the SAIF assessments," said Frank J. Barkocy, senior vice president of Josephthal Lyon & Ross Inc. "But that's going to be a benefit for these institutions going forward. I think investors have looked past these charges."

James B. Arndorfer contributed to this report.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.