The effects of last year's interest rate increases are still being felt at some Midwest banks and thrifts, including Cleveland-based Keycorp, which reported second-quarter net income down 10.3%, to $199 million.

Firstar Corp., Milwaukee, was able to overcome higher costs of funds to report an 8.5% increase in quarterly net income, to $53.8 million. And loan growth, securities gains, and cost controls helped Chicago-based Harris Bank post record net income of $42.1 million, up 15%.

Charter One Financial Inc., a $6.3 billion-asset thrift also based in Cleveland, said its earnings rose 5.8%, to $18.2 million. But its merger partner, Firstfed Michigan Corp., Detroit, reported a 13.5% profit slide, to $12.8 million.

For the first six months, Keycorp reported net income of $408.7 million, a 5% decline. Jim Wert, the banking company's chief financial officer, said the year-over-year drop was due to factors hurting the net interest margin. Interest rate increases pushed up the company's funding costs faster than yields rose on loans and investments.

But this is beginning to change. Loans increased 11.1% from the level the year before, to $48.1 billion. While the use of borrowed funds and higher-cost time deposits caused the net interest margin to shrink 49 basis points, a balance sheet restructuring during the past year added nine basis points to the margin.

"There was a very steep drop in net interest margin that was reversed in this quarter," said Carole Berger, an analyst at Salomon Brothers Inc. "While the margin is still below what it was a year ago, the downward trend has been reversed, and that is important."

Increases of more than 11% in consumer and commercial lending helped Firstar report its earnings increase for the quarter, to 70 cents a share. However, profit in the year-ago quarter had been reduced by a charge of 17 cents per share for losses resulting from a check-kiting fraud.

For the year to date, the company has earned $90.1 million, a 17.9% decline from the first half of 1994.

Harris' strong quarter came in contrast to the $3.1 million earned in the same period a year ago. Last year, the subsidiary of Bank of Montreal took a $33.4 million after-tax charge for impaired mortgage-backed securities held in customer accounts.

For the six months ended June 30, the $17.1 billion-asset bank reported earnings of $80.2 million. This was a 136.7% rise from the same period of 1994, which was also hurt by the second-quarter charge.

Charter One's net for the six months ended June 30 rose 8.8%, to $36 million. The company attributed its earnings increase to 8.1% growth in average loans.

William Dupuy, a Charter One vice president, said loans increased from last year's total because repayments fell. The additional interest earned on these assets offset a 27-basis-point decline in net interest margin caused by higher interest rates and competition for funding.

The burden of high-cost interest rate swaps continued to hurt earnings at FirstFed Michigan. However, earnings did grow during the first six months, to $24.3 million. That compared with a net loss of $121.3 million in the same period of the previous year, caused by a $155.4 million loss on the termination of swaps during the 1994 first quarter. +++ Keycorp Cleveland Dollar amounts in millions (except per share) Second Quarter 2Q95 2Q94 Net income $199.0 $221.8 Per share 0.83 0.89 ROA 1.19% 1.43% ROE 16.86% 19.77% Net interest margin 4.49% 4.92% Net interest income 681.3 695.1 Noninterest income 222.9 227.4 Noninterest expense 568.6 538.7 Loss provision 20.3 35.0 Net chargeoffs 20.0 31.2 Year to Date 1995 1994 Net income $408.7 $430.4 Per share 1.69 1.74 ROA 1.24% 1.42% ROE 17.55% 19.49% Net interest margin 4.44% 4.97% Net interest income 1,340.1 1,377.8 Noninterest income 393.9 454.0 Noninterest expense 1,129.4 1,081.5 Loss provision 38.8 71.8 Net chargeoffs 37.3 62.5 Balance Sheet 6/30/95 6/30/94 Assets $67,481.2 $63,359.7 Deposits 48,672.2 47,796.2 Loans 48,093.2 43,157.6 Reserve/nonp. loans 278.88% 264.21% Nonperf. loans/loans 0.65% 0.72% Nonperf. assets/assets 0.54% 0.68% Nonperf. assets/loans + OREO 0.76% 1.00% Leverage cap. ratio* 5.91% 6.76% Tier 1 cap. ratio* 7.42% 8.77% Tier 1+2 cap. ratio* 10.77% 12.03% *estimated ===

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