Wednesday, August 26, 1998

Banks may see troubled times

AUSTIN (AP) - Texas banks, with three years of record profits under their belts, might see some tighter times ahead.

While earnings were good for the state's 855 banks in the first quarter of this year, their net interest margins fell, according to Austin-based bank research company Sheshunoff Information Services Inc.

Net interest margins are the difference between what banks charge for loans and what they pay for deposits.

Fee income and interest typically are the sources of most bank profits. The declining interest income could point to lower profits in the future, said Bob Colvin, Sheshunoff's managing director of community banking.

"This indication of weakness may point to more difficult times ahead," Sheshunoff told the Austin American-Statesman.

The net interest margin at Texas banks dropped from 4.43 percent to 4.03 percent in the first quarter of 1998 from the fourth quarter of 1997, according to Sheshunoff.

Colvin said the margin is the lowest in the last five years. It continues a steady quarterly decline since the second quarter of last year, when Texas banks reported their third straight record earnings at $2.8 billion.

"The net interest margin has declined since. While it was steady most of last year in the 4.40 percent to 4.50 percent range, it looks as if we have moved to another range," Colvin said.

The 40-basis-point decline was even greater than the decline of 33 basis points for all banks in the nation in the first quarter.

Rates on loans and long-term investment rates have inched downward as deposit rates stayed steady, said Hartland Bank Chairman David Hartman, partly as the result of heightened competition between banks.

"It's basically the state of the monetary market and increased competition," said Hartman. "Banking is always most profitable when there is a steep yield curve, and short-term rates are low and long-term rates are high.

"We are moving into the exact opposite situation right now."

As mergers and acquisitions give larger banks in Texas a larger share of the market, pricing policies will have a depressing effect on the rest of the banking industry, said Steve Scurlock, senior vice president of the Independent Bankers Association of Texas.

"We've been hearing from our community banks that some of the larger banks are doing some fairly aggressive pricing on some lending," Scurlock said. "I guess they feel like they can make up for a loss in spread, or net interest margin, by volume."