For the first time in years, there is some optimism about community banks' results ahead of the quarterly reporting season.

Analysts said they finally have reason to believe that credit quality could be getting better as many banks restructured balance sheets in 2010. The research team at KBW Inc.'s Keefe, Bruyette & Woods has estimated that nonperforming assets at small and midsize banks fell 0.7% in the fourth quarter from the third quarter.

When community banks report fourth-quarter results in the coming weeks, "we are expecting to see fairly strong year-over-year earnings growth largely on the back of improved credit quality," said Aaron James Deer, an analyst at Sandler O'Neill & Partners LP. "We could even approach an inflection point where it starts to decline."

Still, analysts will be sorting among myriad bank results to separate leaders from laggards, to determine who is thriving and who is merely surviving. Many banks continue to struggle with capital issues and remain indebted to the Treasury Department's Troubled Asset Relief Program. Balance sheets keep shrinking at many banks as loan growth remains elusive.

Credit quality also continues to be a key differentiator. Most analysts expect signs of stabilization, particularly in healthier states where banks have already reported declines in nonperforming loans.

Such was the case at Astoria Financial Corp. in Lake Success, N.Y. Nonperforming loans at the $18.9 billion-asset company fell 3.7% at Sept. 30 from a quarter earlier, to $399.6 million.

Still, some wonder if the improvement was sustainable.

"I'm cautiously optimistic about credit quality looking good for the second quarter in a row," said Mark Fitzgibbon, an analyst at Sandler O'Neill & Partners LP.

The biggest separation could occur in distressed states such as California. Deer expects City National Corp. in Los Angeles to be a leader in the Golden State. The $21.8 billion-asset company had $297.6 million of nonperforming assets at Sept. 30, down 34% from a year earlier.

Jefferson Harralson, an analyst at Keefe, Bruyette & Woods, is watching the Southeast and the Sun Belt. "We know what to expect in states like Georgia and Florida," he said. "In states like Tennessee, Texas and North Carolina we're trying to figure out" if delinquencies will rise, peak or fall.

Harralson highlighted Pinnacle Financial Partners in Nashville, Tenn., which could show a peak in nonperforming following a period of unexpected deterioration.

Another company to watch is Old Second Bancorp Inc. in Aurora, Ill., a major residential lender near Chicago, one of the hardest-hit areas in the housing downturn. At Sept. 30, more than half of the $2.3 billion-asset company's construction and development book was nonperforming. Also, nonperforming assets totaled $285 million at Sept. 30, making up 11.6% of total assets and up 23% rise since the end of 2009.

"We want to know how credit and capital is trending," said Daniel Cardenas at Howe Barnes Hoefer & Arnett Inc.

Capital remains on the minds of those who follow Old Second. The company and its bank are well capitalized but the bank is out of compliance with higher-than-normal capital ratios required by a 2009 enforcement action. The company last year called off a plan to swap common stock for trust-preferred shares to focus on cutting assets and costs to build capital.

Also operating under a regulatory order is National Penn Bancshares Inc. in Boyertown, Pa. After it struggled to lift capital ratios, National Penn's fortunes turned last year when Warburg Pincus invested $150 million in the $9.24 billion-asset company.

"I think people will be hitting them up to find out whether they're finally going to repay Tarp, and if they're going to get out from under the" regulatory order, said KBW's Damon DelMonte.

In a twist, Rick Weiss, an analyst at Janney Montgomery Scott, said he'll be listening for indications from Scott Fainor, National Penn's chief executive, that the company may eventually use its newfound capital for acquisitions.

The same can be said for Glacier Bancorp in Kalispell, Mont., which last year outlined a bold acquisition strategy that never came to fruition, leaving the $6.47 billion-asset company's capital levels at an all-time high. Some analysts predict deals for 2011.

First Niagara Financial Group in Buffalo, N.Y., could become a regional powerhouse after buying NewAlliance Bancshares Inc. Analysts want an update on the deal and a sense of whether the $20.8 billion-asset company is set to buy again.

Also pending is Hancock Holding Corp.'s deal to acquire Whitney Holding Corp. in New Orleans. Hancock's $8.3 billion of assets combined with Whitney's $11.5 billion would create one of the largest community banks in the Gulf Coast region.

"It will be interesting to see if Whitney chooses to close some offices … and discusses its decision to sell," Harralson said.

Balance sheet management remains a topic of interest. Most banks have aggressively restructured their balance sheets and shrunk assets. Analysts have waited to see what a "true" balance sheet looks like.

Signature Bank in New York may be a sign of things to come. Terry McEvoy, an analyst at Oppenheimer & Co., said he would likes to see if the $10.9 billion-asset company's results are in line with a stock that rose nearly 30% during the fourth quarter. "We want to know if the fundamentals support that kind of move," he said.

Peyton Green at Sterne Agee said Signature is following up on a third quarter marked by strong deposit and loan growth, expense control and low credit costs. "There are very few banks whose cylinders are firing on all levels like this."

Though many analysts were concerned about banks' inability to expand portfolios, some are being closely watched due to loan growth, even in the most ailing states.

SVB Financial Group in Santa Clara, Calif., increased loans by 7% during the first nine months of 2010, to $4.9 billion. About 83% of the loans are in commercial loans. "Silicon Valley Bank has a very unique franchise and they have posted strong loan growth during the past couple quarters, and I expect that to continue," said Deer.

Deer attributed SVB's loan growth to its focus on commercial business, specifically in technology and life sciences companies where private equity continues to show strong investment interest. He expected the $15.7 billion-asset SVB to continue to have loan growth in the double digits.