Banks’ Midyear Profit a Record $10.5 Billion : Gain Comes Despite Heavy Losses in Texas

The nation’s commercial banks enjoyed their most profitable six months on record through June this year despite continuing losses in Texas, the government said Wednesday.

“You could hardly ask . . . for better,” said L. William Seidman, chairman of the Federal Deposit Insurance Corp.

Commercial banks earned $10.5 billion in the first and second quarters this year, topping the $9.7 billion in net income for the second and third quarters of 1985, which had been the most profitable six months since the FDIC began keeping track in 1934.

In the first half of last year, banks lost $5.4 billion. The big loss was almost entirely attributable to huge reserves set aside by the largest banks for expected losses on loans to Third World countries.

Banks have not seen the need to build those reserves further this year and are thus earning strong profits. Banks set aside $916 million on foreign loans in the first six months of this year, compared to $16.4 billion in the year-ago period.

Bleak in Texas

“We think . . . we will see record profits for the year if the economy continues on its current level,” said Seidman, whose agency insures commercial banks’ deposits up to $100,000. The most profitable year for banking was 1985, when the industry posted earnings of $18.1 billion.

The April-June period of 1988 was the second most-profitable quarter on record after the July-September quarter of last year, when banks reported $5.8 billion in net income.

However, the banking picture remained bleak in Texas, a state troubled by soured real estate prices and a depression in the oil industry. Banks there lost $2.9 billion in the first half, with $2.3 billion of that attributable to a single institution: First RepublicBank Corp. of Dallas, which has since been rescued with $4 billion in federal money.

Elsewhere in the oil dependent Southwest, banks earned modest profits.

Seidman said he hoped that the condition of banks in Texas would improve now that so many have been closed or merged with healthier institutions. At the end of August, 173 U.S. banks had failed or required government assistance to stay open. Ninety-seven of those--including 42 First RepublicBank subsidiaries--were located in Texas.

Midwest Improving

Seidman said failures would continue at the same rate this year, setting a post-Depression record, but then decline next year.

In the Midwest, battered earlier in the decade by farm bank failures, the profitability of most banks has been restored. In the first half, 7% of banks in Iowa, Kansas, Minnesota, Missouri, Nebraska, North Dakota and South Dakota lost money, compared to nearly double that amount a year ago.

Farm losses caused by this year’s drought may check the improvement in banks in the region, but Seidman said Midwestern banks should be able to weather any difficulties because they’ve lent more carefully than in the past and because of government aid to farmers.