A handful of midwestern bank executives are stretching the definition of community banking-sometimes by thousands of miles.

The sometimes-desperate hunt for loans or deposits has driven some small-town bankers to form or buy institutions in noncontiguous states hundreds and even thousands of miles away.

"It is by far not a typical thing, but you're seeing more people doing it," said Joseph A. Stieven, banking analyst at Stifel, Nicolaus & Co., St. Louis. "Most institutions are overcapitalized, and they need to use that capital."

For some institutions, employing their capital has meant going from, say, Wisconsin to Texas or Michigan to Arizona. Further, with competition increasing in their home markets, more community banks may be thumbing through the atlas. But as with all merger strategies, there are risks as well as rewards of which bankers should be aware, observers said.

Jefferson Savings Bancorp., Ballwin, Mo., is a case in point. A couple of years ago, the thrift company was hard-pressed to make a loan in the competitive St. Louis metropolitan market. It had much of its deposits tied up in low-yielding securities, said chief financial officer Paul Milano.

So it decided to jump into a more torrid lending climate: Texas'.

In 1995, Jefferson spent $51.1 million in cash to buy three Texas thrifts with $370 million of assets. Thanks to two acquisitions in the past four months, about half of Jefferson's $1.3 billion of assets are in Texas.

The Texas acquisitions have "done great things for us and made a tremendous impact in our operations and bottom line," Mr. Milano said.

Indeed, increased lending helped boost the company's earnings 18%, to $7.6 million, from 1995 to 1996, minus a one-time deposit insurance charge.

Waupaca (Wis.) Bancorp entered Texas the same year as Jefferson, but it was looking for deposits rather than loans.

Archie Overby, a Texas native who now is chief executive officer of the $225 million-asset banking company, said he needed more deposits because the bank was lending near its capacity. Demand for small-business and real estate loans ran high in Waupaca, a popular central Wisconsin vacation spot.

An acquisition seemed the perfect solution, but prices were too high in Wisconsin, Mr. Overby said. In 1994 he discovered that National Bank of Commerce, Pampa, Tex., was looking to sell.

Texas was still in the economic doldrums, so Waupaca could pay just 1.1 times book value for the bank, which then had about $30 million of assets. "It was mostly luck," Mr. Overby said.

Currently the Texas bank has a loan portfolio totaling $28 million, and $10 million of that comprises credits originated in Wisconsin, Mr. Overby said.

Rather than buying institutions, some community banks are chartering new subsidiaries.

Capitol Bancorp, Lansing, Mich., has chartered eight banks in its home state since it was organized in 1988, said chief executive officer Joseph D. Reid. Last year the $500 million-asset banking company took its act to Arizona, opening Bank of Tucson.

Like Mr. Overby, Mr. Reid said he had been looking for a source of funds.

"Michigan has strong loan demand, and deposit gathering is difficult," Mr. Reid said. "Arizona has weaker loan demand, and the cost of funds runs a lot less than in Michigan."

Since opening 10 months ago, Bank of Tucson has reached $25 million of assets and $9 million of loans and is already profitable, Mr. Reid said. Capitol plans to open a subsidiary in Scottsdale, Ariz., in the second quarter of 1997.

Though all three bank executives were confident in their decisions to expand, banking consultant Chris Hargrove was leery of such moves. His argument: Community banks are less equipped than regional banks to monitor the performance of out-of-state subsidiaries.

"I'm trying to talk a client out of doing that right now," said Mr. Hargrove, president of Professional Bank Services, Louisville, Ky.

But the bankers countered that such moves were feasible because they had researched the markets. Moreover, all three noted that they had hired local bankers to run their out-of-state operations.

"In my opinion, credit is credit, whether it's financing in Wisconsin or Texas," Mr. Overby said. "A rural bank is pretty much the same anywhere."

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