Mortgage Rate Drop Helped Midwest Banks, But Dip in Loan Quality

The swift drop in 30-year mortgage rates helped propel third-quarter earnings to relatively lofty levels at Midwest community banks and thrifts, analysts said.

Wayne R. Bopp, a thrift analyst at Stifel, Nicolaus & Co., St. Louis, said the rate drop brought a "nice little surprise" to companies originating and selling into the secondary market. "That's hard to forecast, and that's kind of propping up earnings," he said.

While the region's bank and thrift earnings have mostly been in line with expectations, some analysts gave mixed messages on the outlook.

For instance, Gregory P. Anderson, an analyst with Chicago Corp., said he's been detecting the "first inklings" of asset quality deterioration - a slowdown he has been anticipating for several quarters.

He also said he had found third-quarter results weaker than he had anticipated, largely because he had expected banks' rebates from the Federal Deposit Insurance Corp. to have a larger impact on earnings - the FDIC cut premiums for banks to 4 cents from 23 cents per $100 of deposits.

"In talking to people originally, in the vast majority of cases, they were saying they were going to allow that money to drop to the bottom line," he said. But he added: "You didn't really see a lot of that."

Analyst Daniel G. Bandi, of Ohio Co. in Columbus said that "in terms of expectations," overall third-quarter results were "pretty much been what we were looking for, which really wasn't a barn-burner quarter, particularly for the thrifts."

He added that"it seems like you're seeing significant interest-income growth - but interest expense is far outpacing it."

John Cornwell, an analyst with Cleary Gull Reiland McDevitt Inc., Milwaukee, agreed that the region's bank and thrift earnings mostly have been in line with expectations.

But the quarter did bring some individual surprises. Analysts identified several institutions that exceeded their income estimates, though they were hard-pressed to cite any that did considerably worse than expected.

For instance, Ohio Co.'s Mr. Bandi lauded D&N Financial Corp., a Hancock, Mich., thrift that's rebounding from a near-death experience. "They're just hitting their stride," Mr. Bandi said.

D&N reported third-quarter income of $3 million, 125% more than a year earlier. Its residential mortgage loans were up 334%. Problem interest rate swaps are repricing and moving off D&N's books, improving its net interest margin, Mr. Bandi said.

In addition, CB Bancorp, Michigan City, Ind., had "an amazing quarter," with net income up 86.6% to $738,000, he said.

CB Bancorp cited an increase in earning assets from its mortgage loan reverse-repurchase program, in which it buys loans from mortgage banks and sells them back later.

In St. Louis, Jefferson Savings Bancorp exceeded Mr. Bopp's expectations, reporting third-quarter earnings of 47 cents per share, up from 34 cents the second quarter. Mr. Bopp subsequently raised his 1995 earnings estimate on Jefferson by 10 cents, to $1.45.

And First Indiana Corp., Indianapolis, surpassed Mr. Anderson's expectations, earning $4.2 million in the third quarter, up from $3 million a year earlier.

First Indiana has seen its earnings improve since focusing on home equity, construction, and business lending last year.

"These are core earnings, and we think it's a good representation of what we can look for going forward," said Kenneth L. Turchi, senior vice president.

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