Two of the East Bay's largest community banks have managed to weather the storm of a sour economy — at least so far — based on their most recent quarterly results.

Fremont Bank and Mechanics Bank both posted profits for the July-September quarter, according to separate regulatory filings by the community banks.

"These two banks seem to be holding their own in a difficult environment," said Michael Yoshikami, president of Walnut Creek-based YCMNET Advisors Inc., an investment firm.

Richmond-based Mechanics Bank earned $3.8 million in the third quarter, although the profits were down 30 percent from the year-ago quarter, the filing showed.

Fremont-based Fremont Bank earned $4.3 million, which was up about 10 percent from the year before.

"The improvement in profits year over year is primarily related to higher levels of residential mortgage originations, which are sold in the secondary market for a gain," said Ron Wagner, Fremont Bank's chief financial officer.

Fremont Bank and Mechanics Bank must confront the twin challenges of a dreary economy and failed commercial real estate loans.

Analysts and regulators have increasingly scrutinized community banks because commercial property values have sagged, said Greg Genovese, president of the securities division of Thompson National Properties, a realty investment firm.

"The problems facing community banks are a hot-button issue," Genovese said. "Can these

Still, a review of the regulatory filings suggests that plenty of challenges loom for the two banks.

Both banks are setting aside more cash reserves to cope with possible loan losses:

nFremont Bank increased its reserves for loan losses by $10.2 million in the third quarter. That was below the pace of the second quarter, when the bank increased its provision for loan losses by $15.1 million.

nMechanics Bank increased loan loss provisions by $7.6 million in the third quarter. That topped the second quarter, when Mechanics increased its reserves for loan losses by $6 million.

Bad loans continued to surface at the two banks.

Fremont Bank, as of Sept. 30, had a total of $40.8 million in non-accrual loans, which are past-due loans that no longer accrue income for the bank. Fremont Bank's failed loan totals rose by $21.9 million in the third quarter.

On Sept. 30, Mechanics Bank had $36.1 million in non-accrual loans. The failed loans increased by $4.2 million during the July-through-September period.

Mechanics Bank, though, believes it is turning the corner on problems with failed loans.

"We feel we have a grip now on the loan losses," said Steve Buster, chief executive officer with Mechanics Bank. "We anticipate some relief in contributions to loan loss reserves in 2010 compared to this year."

Why the brighter outlook? The bank believes the quality of the loans on its books has stabilized.

"Our portfolio now is primarily income-producing real estate as opposed to concentrations of construction or land development loans that our industry has suffered," Buster said.

Strong factors in favor of each bank: Fremont and Mechanics both are bolstered by sturdy deposits, the filing showed.

Deposits at Mechanics Bank totaled $2.29 billion at the end of September, up 2 percent from the end of the second quarter. Assets totaled $2.83 billion on Sept. 30.

Fremont Bank's deposits totaled $1.83 billion at the end of the third quarter, an increase of 5.9 percent from the second quarter. Assets totaled $2.4 billion.

"Both of these banks, while they are facing challenges, don't seem to have the scope of the problems that some of the other community banks are having," Yoshikami said.

George Avalos can be phoned at 925-977-8477