One of the banks that led the industry's charge into mortgage banking last year is having a tough time of it.

First Security Corp. of Utah, which purchased Crossland Mortgage last May, says falling loan demand and stiff competition have taken a toll on the unit and hurt the parent company's earnings.

In the fourth quarter, loan production by Crossland fell below projections in the parent's business plan, and costs climbed as well, First Security said in its earnings report for the period.

"Crossland Mortgage continues in a rigorous process of reengineering to adjust to the evolving realities of the mortgage production market," the report added.

Over the past year, a parade of commercial banks bought mortgage banking units, to boost fee income and to sell other products to homeowners.

While it's still too early to judge the success of most of these acquisitions, the case of First Security serves as a warning that strong profits are by no means assured in this highly cyclical business.

Steven R. Schroll, senior financial-institutions analyst at Piper Jaffray Inc., said Crossland's poor performance had cost First Security about $1 million to $2 million of losses per quarter.

Mr. Schroll said Crossland "is causing an earnings drag at the company." First Security company paid a "very full price" for Crossland, he said, and when refinancings abruptly ended in an industrywide slump, First Security lacked an established base of home lending to cushion the blow.

"They underestimated the degree of impact that the additional business would have on them should the business turn," he said.

James R. Bradshaw, vice president for research at Pacific Crest Securities Inc., said First Security officials hinted to him that Crossland's loan production had been lower than the bank expected.

Mr. Bradshaw's figures for First Security's wholesale lending volume show only a 7% decline, to $2.7 billion, from 1993 to 1994. He guessed that more volume shrinkage was experienced by Crossland's retail originations unit.

But he predicted that First Security's foray into mortgage banking would, in the end, be successful.

"They are a player in the mortgage industry because of this acquisition," he said. "The payoff isn't as quick as I expected or they expected, but long-term it should work out for them."

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