Donaldson Lufkin gives Hawkeye a 'very attractive' initial rating.

Donaldson, Lufkin & Jenrette Securities Corp. has opened coverage of Hawkeye Bancorp. with a "very attractive" rating, saying the Iowa bank is well managed and a takeover candidate.

"Hawkeye is steadily raising return on assets, and it ranked No. I in asset quality in our latest quarterly survey" of 65 bank holding companies, banking analyst Frank R. DeSantis Jr. said Monday.

The stock price of the Des Moines-based bank, whose shares suffered from volatility during this summer's disastrous midwestern floods, was ahead 12.5 cents, to $18.625 a share, in late afternoon trading Monday.

The analyst said he thinks the stock could reach $23 within 12 to 18 months, which would be a 24% gain from its current level.

Mr. DeSantis predicted that the flooding's long-term impact on Hawkeye would be minimal, though the Des Moines area was especially hard hit. "Iowa is estimated to have sustained $750 million in crop losses, which is less than 2% of gross state product," he said.

Moreover, the analyst noted, "flooded areas must be rebuilt, which will help the Iowa economy much like Hurricane Andrew helped the Florida economy."

Thus, he saw no major impact on the bank company's earnings.

Hawkeye, with assets of $1.8 billion, is the largest publicly traded, independent bank in Iowa. It ranks third in market share behind the affiliates of Norwest Corp., Minneapolis, and Firstar Corp., Milwaukee.

Takeover Prospects

Mr. DeSantis said he would not recommend buying the Iowa bank's shares on takeover sentiment alone, "but the long-term appeal of Hawkeye to an outside institution cannot be ignored."

Iowa banks are eligible to be acquired by banks in Minnesota, Wisconsin, Illinois, Missouri, Nebraska, or South Dakota - contiguous states that offer reciprocal acquisition opportunities.

"Notably absent in Iowa is First Bank System [Minneapolis], which would be a logical buyer, and we think that Banc One [Columbus, Ohio] would also view Hawkeye as an attractive way to enter the Des Moines market once state law permits," he said.

Meanwhile, Mr. DeSantis said, Hawkeye's biggest competitive advantage is focusing on business relationships and communities "that are too small to matter to the market leaders."

Mid-1980s Restructuring

The bank has come a long way since 1985, when it was near the brink of bankruptcy from heavy loan losses. Nonperforming assets that year hit a high of 8.7% of loans and foreclosed real estate.

Since a debt-restructuring effort in 1987, the bank is healthy again. Its nonperformers were a minuscule 0.74% of loans and foreclosed real estate at June 30.

Hawkeye earned 1.24% on assets during the second quarter, versus 0.96% on average for banks its size, according to Keefe, Bruyette & Woods Inc. Its efficiency ratio - gross operating expenses divided by fully taxable revenue - was 63%, versus 63.8% for its peers.

With expense control a priority for Hawkeye's management, Mr. DeSantis said, he believes that overhead ratio could fall below 60% in two years, "which would result in 5% earnings growth without any revenue growth."

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