Though the government reported the smallest increase in labor costs in a year Thursday, financial stocks resumed their decline.

The Labor Department reported an increase of just 0.9% in the employment cost index for the third quarter, indicating that historically low unemployment has not put pressure on wages. Normally, interest-rate-sensitive stocks would react positively to such news, but after mixed early trading, the American Banker index of 225 banks closed down 1.03%, its index of the top 50 banks lost 1.53%, and the S&P 500 fell 0.03%. The Nasdaq rose 1.32%.

The stocks of two small banking companies were upgraded by analysts, however, as the companies appear to be bucking the conventional wisdom that the industry will have slower growth in earnings for the foreseeable future.

David H. Winton, an analyst at Keefe, Bruyette & Woods Inc., upgraded Firstfed Financial Corp. of Santa Monica, Calif., to “buy” from “market perform” because, with a $384 million market capitalization, it beat his third-quarter earnings estimate by two cents, reporting 54 cents per share. “The positive surprise relates to a better-than-expected earning asset mix and a higher net interest margin,” Mr. Winton wrote in his research note.

The company reported strong loan growth, up 17% on an annualized basis from the second quarter, a relatively low 0.29% ratio of nonperforming assets, and a 2% loan-loss reserve ratio, making Firstfed an attractive investment, Mr. Winton said. “In a time when investors are concerned about credit risk, Firstfed is a good choice.” The company is trading at 8.5 times Mr. Winton’s 2001 earnings projection, which he also raised, to $2.55 per share from $2.25.

Firstfed escaped the market’s downward move Thursday and closed up 56.25 cents, or 2.25%, at $22.875.

Mr. Winton said that interest rates should remain stable, a potential boost to net interest margins in the fourth quarter. He estimated that Firstfed’s margin would ease 15 basis points because fourth-quarter loan yields will be reevaluated based on higher rates in the third quarter, as monitored by the 11th District Cost of Funds Index. The average COFI rate was 5.21% in the second quarter (which is the basis for the third-quarter valuations) but 5.5% in the third.

Also on Thursday, analyst Timothy Willi of A.G. Edwards & Sons Inc. changed his rating of Mississippi Valley Bancshares of St. Louis to “buy” from “maintain” on the opinion that the stock of the $253 million market-cap company is undervalued.

“We believe earnings growth rates are capable of accelerating over the next two years,” he said in a research note. “Earnings growth will be driven from the company’s focus on a single line of business, a strong credit culture, and a very cost-efficient branch infrastructure.”

Mississippi Valley was described as a traditional bank, with 85% of total revenues coming from net interest income. To fund its lending business, Mr. Willi said Mississippi Valley “will often aggressively compete for deposit dollars within their seven-branch area” and stands to benefit from continued consolidation in the South, which is driving some customers into the hands of smaller companies. He acknowledged the risk of shrinking margins and rising funding costs. Indeed the net interest margin has fallen to 3.46% in the last quarter from 4.01% in the first quarter of 1999, but Mr. Willi said the company may have hit its bottom.

“We expect to see margin expansion and strong loan growth through 2001,” he said.

Mississippi Valley fell 31.25 cents, or 1.19%, to $26.

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