Squeezed margins and stagnant real estate development income contributed to a 31% drop in third-quarter earnings at Illinois' Southwest Bancshares.

Southwest, based in the Chicago suburb of Hometown, reported third- quarter net of $1.01 million.

"The margins obviously are compressing," said Richard E. Webber, president and chief financial officer of the $364 million-asset company. "But our return on average assets is still well over a dollar (1%), so we compare pretty favorably with the other thrifts."

Southwest's third-quarter rate spread shrank from 4.04% a year earlier to 2.96%. Its net interest margin decreased to 3.52% from 4.49%.

Still, Southwest reported third-quarter ROA of 1.12%, though it was down from 1.72% a year earlier.

The company's two real estate development subsidiaries can be a boon to earnings - but not this year.

Zoning issues have slowed the most recent phase of the Southwest's joint-venture developments, said Wayne R. Bopp, a thrift analyst at Stifel, Nicolaus & Co. Inc., St. Louis.

But by late 1996, related income should notably boost earnings, he said.

"It's not an issue of how much they're going to earn," Mr. Bopp said. "It's a question of when they're going to earn it. It does bounce around a lot. They will have no income from real estate development for the next three quarters. They can't build (homes) any faster."

In addition, the company's Southwest Federal Savings and Loan Association, which has five offices in Chicago and its southwestern suburbs, traditionally has been a fixed-rate lender, funding loans with lower-cost deposits. Rising interest rates have pushed deposit costs higher, but not income from 30-year loans, Mr. Bopp said.

Mr. Webber, who also is president and chief executive officer of the thrift, predicted a fourth quarter similar to the third. "I'm just hoping it's bottomed out," he said.

Mr. Webber "knows they're having a down year," Mr. Bopp said. "He's doing everything he can in the meantime, buying back stock and just honestly communicating with people so they don't think the worst. He's doing a good job."

Nine-month income fell 27.4% to $3.28 million. Nine-month return on assets was 1.23%, compared with 1.81% a year earlier.

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