The nation's most profitable community banks have a knack for making big money - even when the business is a bit choppy.

Last year, amid climbing interest rates and narrowing profit margins, the best large community banks churned out a whopping 2.58% return on average assets, more than double the 1.15% return for the industry, according to an American Banker survey.

The best small community banks responded in kind, returning 2.43% on assets.

"They are obviously doing what they do best," said Diane Casey, a banking consultant with Grant Thornton, a Chicago-based accounting firm. "Their biggest challenge is to maintain their consistency. For a lot of these banks the world is going to be changing." Tables begin on page 8.

The annual survey selected the large banks - with assets ranging from $50 million to $1 billion - from 5,587 institutions, and the small banks - with assets less than $50 million - from a group of 4,618.

The survey found that earnings for both groups vaulted 21% from 1993, while earnings increased 3.7% for banks nationally. It also shows that the banks are growing in excess of 20% on average over the last three years, while keeping a lid on expenses and problem loans.

Topping the list of large banks was First National Bank of Keystone, W.Va., with a 7.5% return on average assets. The bank specializes in buying FHA home improvement loans and selling them as securities to investors.

It also distinguished itself as having the most productive employees. Each person produces an average of $487,000 in pretax operating profits.

"Our people take on extra jobs within the bank," said J. Knox McConnell, president. "We constantly look to save money."

Mr. McConnell said employees clean the office, and one employee grew so tired of the bank's leaky roof she donned a pair of overalls and tarred the top of the building.

"That was two years ago and it never leaked since," Mr. McConnell said.

Tri-State Bank and Trust, Haughton, La., captured the No. 2 spot with a 4.7% return on assets. The bank, a combination of three failed institutions, generated profits largely by making recoveries on bad loans, said Ed Kennon, president and owner.

Mr. Kennon said the Federal Deposit Insurance Corp. paid him to buy $100 million in failed bank assets in 1989.

"I've been able to collect a lot of those loans," he said. "It has just been a nice little bank. I'm a happy banker."

First National Bank of Houma, La., had the second-largest jump in its ROA to make the list. It ranked eighth with a 3.35% ROA, up from 0.95% the prior year.

Jerome Mire, president and chief executive, said the increase is largely due to a $4.5 million tax credit from prior losses.

"We did dig in and survive," Mr. Mire said. "We are kind of reaping the benefit of that."

Of the top 100 small community banks, BestBank of Boulder Colo., reported the highest ROA of 4.96%, up from 0.72% in 1993.

While BestBank was a newcomer to the list, Avery County Bank of Newland, N.C., has made it every year since 1990.

The $46 million-asset bank specializes in consumer lending and finances Christmas tree and ornamental shrub growers, said Martha Guy, Avery County Bank's president.

The bank, with 13 employees, has kept its expenses low and problem loans to nearly zero.

"We just work hard and that's it," Ms. Guy said.

Some analysts say these banks aren't reflective of the industry because their profits are distorted by extraordinary events like asset sales or securities gains. The analysts also claim that the group generally targets a narrow niche that generates big profits.

The huge earnings "tells me that it is a collection of odd ducks that don't have much to do with the banking industry," said Arnold Danielson, president of Danielson Associates Inc., a Rockville, Md.-based bank and thrift consulting firm.

"In many cases the profits are due to accounting flukes, but in other cases some of these small banks have found unusual strategic niches that permit very high profit from specialized financial services," added David Cates, a principal with Finexc Group , a New York-based bank consulting firm.

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