HONOLULU, Hawaii - Wilfred J. Cross, president of First National Bank of Oblong, Ill., says he knows just what to do with the money saved from reduced deposit-insurance premiums. The bank will give it to shareholders in the form of dividends.

Thomas D. Wilson, a director with Prairie Security Bank, Yelm, Wash., is going to tell the president of the institution to put the money "in the vault" - and then back into the economy in the form of loans.

However they decide to use the funds, community bankers say both banks and their customers will benefit from the premium cuts. Bankers should see bigger profits going forward, and customers could receive lower fees and loan rates, the bankers said.

This month, the Federal Deposit Insurance Corp. said it will slice premiums to 4 cents for the nation's best-run banks from 23 cents for every $100 of insured deposits. The cut is expected to take place in the second half of the year, saving the industry about $5 billion a year.

That savings was a lively topic of conversation this week as community bankers gathered in Honolulu for the annual convention of the Independent Bankers Association of America.

"This buys us a little time to be competitive," said Walter E. Daller Jr., president and chief executive of Harleysville National Bank and Trust Co., Harleysville, Pa.

"If we can get an edge to (let us) increase deposit rates, it will be the best thing to happen to us in a long time," he said.

Mr. Daller said a deposit war is raging in the Philadelphia area. He said he expects to save as much as $700,000 annually from lower premiums, which should help the bottom line and benefit customers with potentially lower loan prices and higher deposit rates.

Other bankers are savoring the fact that they will have to fork over fewer dollars to the government.

Robert W. Hawkins, chairman of St. Louis-based Southern Commercial Bank, said he expects to save $350,000 a year in premium costs, which he called "substantial" for Southern Commercial.

And L. Clark Caley, president of Bank of Clarks, in Clarks Neb., said the $12 million-asset bank will save about $14,000 a year.

"It's a big item to all banks. It has just got to help the bottom line," Mr. Caley said. "I don't think it's going to be a windfall for banks, but it's going to offset the squeeze on profits."

Community bankers, however, are pushing the FDIC to reduce the rates even further. The Independent Bankers Association's board of directors is recommending the agency lower premiums for the best banks to two cents for every $100 of insured deposits.

The board said it believes a 2-cent premium would generate enough income to keep the insurance fund at the mandatory 1.25% reserve ratio. They are worried that if the banking industry is healthy and the Bank Insurance Fund carries a surplus it could work against the industry.

"If you have that much of a surplus ... some smart guy in Congress might try to tap it for some other purpose," said Ronald K. Ence, the IBAA's director of legislative affairs. "It's a very dangerous situation to have."

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