Pummeled by a volatile interest rate environment and Hawaii's slow economic recovery, Bancorp Hawaii reported a 16.4% decline in net income to $28.5 million.

Meanwhile, Idaho's biggest banking company, Boise-based West One Bancorp, reported an 11% increase in net income to $28.7 million.

West One's earnings growth was driven by a 13% increase in average loans, to $6.3 billion. Average assets increased 11% over last year to $8.8 billion.

Bancorp Hawaii's earnings drop was reflected in the bank's performance ratios. Return on average assets dropped 17 basis points from last year to 0.93%, while return on average equity dropped 298 basis points, to 11.42%.

But Salomon Brothers Inc. analyst Carole S. Berger said the earnings decline was also due to a peculiarity of the $12.6 billion-asset banking company's business "that has already been worked through."

Bancorp Hawaii, Ms. Berger said, benefited last year from a large amount of public funds in deposit accounts that were invested very profitably because the yield curve was very steep. But those deposits have since been withdrawn, and the yield curve has flattened. As a result, earnings have fallen below last year's level.

Ms. Berger added there was also a positive surprise in the report. Bancorp Hawaii's net interest margin increased 18 basis points in the quarter, to 3.8%, a bigger increase than she had been expecting.

She said this was due to the bank's disposition of more low-interest assets. The result, she added, was that net interest income grew 4.2% in the quarter - the company's first such increase in a year.

West One's net interest income increased only 8%, to $91.5 million. Furthermore, the company's net interest margin declined 17 basis points to 4.81%. West One attributed the net interest margin squeeze to "a shift in funding mix from transaction and savings accounts to higher-cost certificates of deposit and long term debt."

R. Jay Tejera, with Dain Bosworth Inc., said that loan growth "has outstripped deposit growth," forcing the company to pay more to raise funds.

Mr. Tejera also said he expects U.S. Bancorp's pending acquisition of West One, which is slated for completion at yearend, to dilute the earnings of the Portland, Ore.-based acquirer by at least 5% in 1996. U.S. Bancorp has predicted dilution of 2%.

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