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Banking industry finances remain strong despite earnings decline.

A Veribanc, Inc. analysis of Federal Reserve Board second quarter call report data for the nation's 11,768 commercial banks found their net income had declined 3.5%, from $11.4 billion in the first quarter to $11 billion. However, net income for the period was still 34.1% higher than the $8.2 billion recorded in the second quarter of 1992. The number of banks reporting losses rose 10.8% during the period, from 583 to 646, and the number reporting serious losses increased 26.3%, from 57 to 72. However, the number of undercapitalized banks declined 9.9%, from 101 to 91.

H. J. (Monday) Lowe, president and chief executive officer of the Bank of West Baton Rouge, Port Allen, Louisiana, said community banks are doing well. Unlike large urban banks, community banks have not lost significant "hot money" deposits to securities markets and mutual funds. Lowe, who considered his bank typical of most community banks, expected the spread between interest income received from loans and interest paid on deposits to remain stable over the next 12 to 18 months because "most of the adjustments we've had to make to our investment portfolios already have been made." He said, "In the last year, our spread has dropped only about 22 basis points, from 4.567% to 4.549%. I don't see any problem with keeping it stable in the next 12 months."

In its analysis, Veribanc identified a total of 2,917 banks located in 431 cities and counties in nine states (Illinois, Iowa, Kansas, Minnesota, Missouri, Nebraska, North Dakota, South Dakota and Wisconsin) designated by the Federal Emergency Management Agency as disaster areas because of record summer floods in the Midwest. These banks could be affected by collateral losses and losses of their borrowers' income. Agricultural loans not secured by real estate (the loan category most likely to be affected severely by the floods) amounted to $12.2 billion, 73% of all s to farmers in the area and 34% of all such loans in the United States. Luckily, most banks in the area currently maintain high capitalization levels and have strong financial underpinnings.

Lowe believed most of the smaller banks in the area would be able to withstand the financial pressures resulting from the flood damage. "Since the 1980s, banks have become more cautious and the regulators are doing a better job of making bankers aware of the problems that can arise if customers are affected by events beyond the bank's control," he said.
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Publication:Journal of Accountancy
Article Type:Brief Article
Date:Dec 1, 1993
Words:418
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