Banking Bailout and Banks and Indiana Banks and Irwin Financial and National Bank of Indianapolis and Banking & Finance

FDIC fee hitting small banks particularly hard

October 3, 2009

Fees imposed on U.S. banks to rebuild a Federal Deposit Insurance Corp. fund nearly depleted by scores of bank failures is expected to sap profits of small financial institutions.

Community banks with less income than their larger counterparts are particularly at risk of having their 2009 earnings erased by the charges after an emergency fee on banks took effect June 30.

Already reeling from the additional fee, banks took another hit Sept. 29 when federal regulators voted to require early payments of fund premiums for 2010-2012.

Between the two, the FDIC expects to collect more than $50 billion to replenish the insurance fund that is almost dry from the rash of bank failures that began in mid-2008.

“I don’t like it, but we have to pay it,” said Les Mongell, president of the State Bank of Lizton. “Is it going to create a burden? Yeah, it is.”

The proposal to require early payments of premiums could take effect after a 30-day comment period.

Without the additional support, the insurance fund is projected to run a deficit beginning next year and could remain in the red until 2013, the Washington, D.C.-based FDIC projects.

The June assessment charges banks 5 cents on every $100 of a bank’s total assets, meaning most small banks will still pay a six-figure fee, even before they take a hit from the early payment requirement.

The FDIC had considered taxing deposits instead of assets, which would have hurt small banks even more.

That’s because a much larger share of their income—up to 90 percent—is derived from deposits, compared with about 50 percent for large institutions.

Yet that’s no consolation to community bankers, who fear the early payments of fund premiums will add to their financial woes.

The FDIC, which insures bank deposits, approved the assessment in May and collected it in September. The intent is to rebuild the fund that repays customers for as much as $250,000 of deposits when a bank fails.

The fund has been drained by 25 bank failures in 2008 and 95 so far this year, including the liquidation of Columbus-based Irwin Financial Corp. last month. Consequently, its value had fallen from $34.6 billion at the end of 2007 to $10.4 billion through June 30 this year.

Community banks have flooded the FDIC with letters of protest, outraged over the fee that the Washington, D.C.-based Independent Community Bankers of America said could wipe out half to all of a bank’s 2009 profits.

Morris Maurer, president of the National Bank of Indianapolis, realizes the FDIC insurance fund needs to be replenished.

“But I’m trying to make sense of why a bank like the National Bank of Indianapolis should somehow be responsible,” he said, “especially to pay for the irresponsible mistakes that other banks made.”

With $1 billion in assets, NBI anted up about $500,000, not counting what it will pay in early payments of fund premiums. Mongell at the State Bank of Lizton, which serves Boone and Hendricks counties, forked over $137,500.

The amounts are on top of the annual fee banks typically pay the FDIC’s insurance fund. All told, the Lizton bank will contribute $365,000 in assessments this year, said Mongell, echoing Maurer’s displeasure.

“We played by the rules; we were conservative as a lender,” he said. “Now we’re getting stuck with the expense of it.”

The assessment indeed will wipe out profits many banks expected to post this year, and could push some into the red, said Chris Cole, senior regulatory counsel for the community bankers association.

Joe DeHaven, president of the Indianapolis-based Indiana Bankers Association, can attest to that.

“I’ve got very good, solid banks that have told me it’s taken half of their income,” he said.

Still, Cole said most banks should absorb the additional expense without the danger of being pushed onto the government’s so-called “problem” list. The number of banks at risk of failing, however, continues to mount. It reached 416 through the first six months of 2009, the highest level in 15 years, according to a government report published in late August.

FDIC Chairwoman Sheila Bair told banking leaders in a letter that the agency searched for funding alternatives but found none better. The FDIC has the authority to tap a $30 billion line of credit at the Treasury Department. But asking for taxpayer support “could paint all banks with the ‘bailout’ brush,” she wrote.

Stephen Denhart, president of Hendricks County Bank & Trust Co. in Brownsburg, is uncertain how community banks will recover the loss. Making matters worse, less operating capital hinders their ability to make loans, the bankers argue.

“From everything I hear, that’s exactly the opposite of what the Washington administration would like to see the banks do,” Maurer said.

The credit crisis already has forced banks to reduce lending activity. But signs of a thaw may be emerging. New York-based JPMorgan Chase, the largest bank in Indianapolis based on employees, said Sept. 9 that it lent $926 million to Indiana businesses during the second quarter, an increase of roughly 70 percent from the same period last year.•

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