in excess of 11% in the third quarter for some aggressively marketed loan programs at Mellon Bank Corp. and Signet Banking Corp. A line of credit cards offered by Mellon and a loan-by-check program at Signet have grown dramatically in loan volume over the past year, thanks to aggressive data base marketing efforts. But now analysts say the losses generated by these blitzes could hurt earnings for the banks well into 1996. The losses come just when many companies have adopted data base marketing schemes to target the most profitable customers and build loan portfolios quickly. Analysts said the losses may presage more widespread problems as consumer credit quality declines. "My impression is that the cycle has turned, but only to the extent that we were bouncing along at unsustainably low loss rates," said John Heffern, a specialty finance analyst with Natwest Securities. Mr. Heffern expects higher loss rates as the newer loan portfolios become seasoned. The experience of the two lenders underscores how narrow the margin for error is for banks that use the new marketing techniques, which are designed to aim offers at the most receptive and profitable consumers. Mellon's losses came from its CornerStone card, which appeals to people who pay interest on their credit card balances by offering a rebate on the interest payments. The bank had planned to offer the card to as many as 11 million people. But the 22-month-old CornerStone program did not achieve the results the bank hoped for. While nearly 700,000 cards were issued within a year and total outstandings reached $1 billion, the loss rate jumped even faster. During the third quarter, the bank reported a $29 million rise in loan losses from the program, equal to an annualized loss rate of 12%, according to an estimate by Lawrence W. Cohn, a bank analyst at PaineWebber Inc. On a per-share basis, the increased loss on the Cornerstone program amounted to about 20 cents a share. The problems pushed the bank's overall net credit losses to an annualized 0.57% in the third quarter, compared with 0.25% in the same quarter of 1994, Mr. Cohn said, A spokeswoman for the bank downplayed the problem. "You have to keep in mind that this product is new, and you're going to have this with new product lines," she said. "There is nothing that suggests to us that our marketing strategy has contributed to these losses." Nonetheless, the program, which offers users a complete rebate of interest after 20 years and smaller rebates earlier on, initially attracted the wrong kind of buyers, said Mr. Cohn. He added that the bank has implemented changes to limit problems. "Retrospectively, it is clear that the people who took the card couldn't have cared less about the interest rebate feature," he said. The bank "stomped on the brakes pretty hard when it found out what was going on." The losses from Signet's installment loan program reportedly stem from two 1994 target mailings. The bank said it was testing how lower acceptance criteria would affect response and profitability levels. Indeed, the two mailings generated $175 million in new loans, for the $753 million program. But credit losses from the mailings amounted to $5.7 million - or just over 9 cents a share - in the third quarter alone, equal to an annualized loss rate of 11.23%. Both companies have recognized the problems and implemented changes. Meanwhile, Salomon Brothers Inc. is projecting that Signet's fourth- quarter loss provision will rise to $18.2 million from $8.7 million in the third quarter. Further, Salomon expects the provision to remain above 13% for the first half of 1996. Mellon, too, will continue to face problems caused by its CornerStone program. In its third quarter release, the company said it expects "a modest increase" in credit losses from the program in the fourth quarter. Mr. Cohn said the bank contends that the program's losses have nearly peaked. But the losses created by the CornerStone product have cut the loss reserve to just over 2% of loans. Mr. Cohn is estimating that loan-loss provisions will rise to at least $160 million next year. "If the problems have peaked, the question becomes how quickly will the losses unwind," he said. "It's going to take a long time before we know."

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