Kemper Securities analyst Thomas Maier lowered his rating on First of America Bank Corp. to "hold" from "longterm-buy" Thursday, citing management's disclosure that secondquarter earnings would be weaker than expected.
It was his second negative move in two weeks on the stock. He had lowered the rating to "long-term buy' from "strong buy" when the Kalamazoo, Mich. banking company announced plans to buy F&C Baneshares, of Port Charlotte, Fla.
The latest downgrade focused attention on uncertainty about bank profit margins that has been simmering since the Federal Reserve started lifting shortterm interest rates in February.
The bank, citing narrower margins on its indirect auto and credit card portfolios and a decline in mortgage banking profits, said Tuesday that its quarterly earnings would be between 88 cents and 92 cents per share more than 10 cents off the consensus on Wall Street.
Earnings Estimates Cut
Mr. Maier reduced his annual earnings per share from $4.35 to $4. The company earned $4.14 a share last year.
The bank's stock price, in a down day for bank stocks overall, rose 12.5 cents to $36.625, after falling $1.50 over the preceding two days on the earnings news. The stock is trading only 35.375 cents over its 52-week low.
Analysts were divided on whether First of America's tightening interest margins foreshadow a trend in the industry.
Margins so far have remained relatively healthy despite rising interest rates and persistent inflation fears.
But some analysts said they saw First of America's disclosure as an ominous sign for regional banks.
"This has me very curious about the quality of earnings this quarter," said one.
A Common Theme
"That is a theme we have been hearing from a number of bankers, the somewhat intense pricing pressure," said Joseph Duwan of Keefe, Bruyette & Woods. "It is an issue. Hopefully it is strictly pricing, and not changing underwriting terms" that has hurt margins, he added.
Mark Lynch, of Lehman Brothers, disagreed, saying that First of America was an unique case among regionals.
First of America more resembles a community bank because of its high portfolio of home mortgages with fixed rates and high level of consumer deposits. "They have never run with the pack," he said.
Carole Berger of Salomon Brothers said loan margins would not become a problem, despite the Federal Reserve's decisions to raise interest rates.
It is a myth that banks borrow short and sell long, she said. What tends to happen, she continued, is margins are down but not destroyed in an environment like today's.
Profit Potential Dilution
Interest rates were not the only factor in Mr. Maier's downgrade. He also said the bank's earnings potential has been diluted by its planned acquisitions.
Prior to the announcement of the F&C Bancshares transaction, First of America had announced plans to buy First Park Ridge Corp. of Chicago, and to continue its expansion into Florida with the acquisition of Goldome Federal Savings Bank.