Skyrocketing FDIC premiums depress Ann Arbor bank earnings
The closure of Colonial Bank in Alabama this month may seem far away, but it and similar bank failures are burdening the national deposit insurance system to the point that local banks' earnings are being significantly impacted by increased premiums.
Given a recent report that the Federal Deposit Insurance Corp. has spent $13 billion from its insurance fund, local bankers expect continuing increases in premiums that will translate to depressed earnings.
United Bancorp, parent company of United Bank & Trust, saw its premium increase to more than $400,000 last quarter. And CEO Bob Chapman said he expects the trend of higher payments to persist.
"This is going to continue on for the foreseeable future," he said. "It's part of the cost of doing business, and it's getting higher."
And even though the practical effect of the FDIC system -- what Chapman called "self-insurance" for the banking industry -- is that well-performing banks pay for the losses of failing banks, Chapman did not criticize it.
"In fairness, over time it's been a very good system," he said. "Customers need to have that feeling of confidence."
FDIC premiums are based on a bank's amount of certain types of capital, as well as an assessment of how much of a risk the bank is to the FDIC. The result is larger banks pay more.
Tim Marshall, president and CEO of Arbor Bancorp, the parent company of Bank of Ann Arbor, estimated the bank will pay more than $1 million to the FDIC this year, compared to $413,000 last year and $137,000 the year before.
"It's a big hit at a time when a lot of banks locally, regionally and nationally are all being challenged on several other balance sheet fronts," he said.
Marshall said he didn't think the FDIC system was particularly unfair, but said the industry went for a long time with very low premiums.
"There needs to be a smoothing out of premium payments during good times and bad," he said.
For Ann Arbor State Bank, which was created last year, the higher premiums resulted in a payment of about $40,000, although the bank had only budgeted for $20,000, co-founder Peter Schork said. "It's irritating for us, but I really feel for Bank of Ann Arbor and United Bank & Trust."
United Bancorp's total FDIC premiums went from $144,000 in the first half of 2008 to $1 million in the first half of 2009.
Arbor Bancorp's FDIC assessment went from $97,000 in the first half of last year to $562,000 so far this year.
Congress approved the boost in premiums which took effect this year, and most industry observers anticipate further increases either late this year or early next.
While Arbor Bancorp was able to turn a net profit of $1.46 million in the first half of the year, United Bancorp saw a net loss of $5.46 million.
United Bancorp's Chapman said the FDIC premium issue will continue to hurt the bottom line for some time.
"I think you're going to find that it certainly is going to depress earnings for a while," he said.
Freelance reporter Dan Meisler can be reached at danmeisler@gmail.com.
Comments
Opinari
Fri, Aug 21, 2009 : 10:03 p.m.
Think about this scenario, the FDIC has raised the insurance up to $250,000, used to be $100,000. There are some banks out there offering much higher interest rates compared to the market. These above market interest rates are attracting brokered deposits or rate shoppers with "hot money". And because the FDIC insurance limits where raised to $250,000 some of these banks' deposit growth are at record highs. These types of deposit are not stable and often not from local customers where the bank is located. If for any reason these banks need to lower their interest rates, these broker deposits or "hot funds" will leave quickly to find another institution with the highest rate. At some point in time the bank will have to lower their interest rates because it's squeezing their margins so thin and in many case it causing the bank to have quarterly losses. If these banks continue to offer well above market rates eventually they will get into financial distress the bank may have to go into receivership with the FDIC. The dilemma...the FDIC may have made the problem worse by increasing the insurance limits. The failed banks' deposits ballooned and the FDIC has to cover a greater amount of customer deposits. The FDIC will have to assess another 5 basis points at least once if not twice before years end. Our country has already had 77 bank failures in 2009.
AccruedInterest
Fri, Aug 21, 2009 : 2:14 p.m.
Thanks for your insight. If base is TA less Tier1 [CS & RE], it doesn't pay to leverage one's company too much.
Stephen Lange Ranzini
Fri, Aug 21, 2009 : 12:27 p.m.
To answer the question of AccruedInterest, the FDIC Special Assessment was charged to all banks based on the same formula. This formula was that the assessment was five (5) basis points (0.0005%) calculated upon the banks total assets less tier one capital as of June 30, 2009. The special assessment may not exceed ten (10) basis points times the institutions deposit assessment base for the second quarter of 2009. The final rule allows for additional emergency assessments in the final two quarters of 2009. Those additional assessments may each amount to up to five (5) basis points of total assets less tier one capital (with any single assessment not exceeding ten (10) basis points times the institutions usual deposit assessment base for the corresponding quarter). The additional assessments may be imposed by the FDIC if deemed necessary to ensure that the FDIC fund's reserve ratio does not decline to a level that is close to zero or that could otherwise undermine public confidence in federal deposit insurance. FDIC Chairman Bair commented at the FDIC board meeting in May when the assessment was charged that her current view is that, at worst, there may be a similar five (5) basis point asset-based assessment in fourth quarter 2009. The FDIC was also given a $500 billion line of credit with the Treasury in case more funds are needed. Any borrowings would be paid back by future bank assessments by the FDIC.
AccruedInterest
Thu, Aug 20, 2009 : 3:02 p.m.
the link in the sentence, "FDIC premiums are based on a bank's amount of certain types of capital", doesn't give you the rate of FDIC insurance...that rate is some FICO number (and actually fell from 2009 to 2008). Since one bank saw its FDIC expense increase more percent than, I'm going to bet the part of the increase is based on risk; it isn't just to recoup money for all of the bank closures.
Stephen Lange Ranzini
Thu, Aug 20, 2009 : 2:28 p.m.
Just a couple of comments from the President of University Bank, your hometown community bank. Our tab for the FDIC special insurance assessment was $70,000. My wife keeps asking me when I will be able to get my salary set at $300,000, which was the TARP limit. Only in my dreams do I make $300,000 a year! FYI, we didn't take any TARP money. This bank president works 7 days a week and often 18-20 hour days. That's what is required in the current environment. If businesses need loans, come talk to us. We're lending! You can get the process started as simply as by sending an email to information@university-bank.com Lastly, please don't confuse Wall Street's "investment banks" with "banks". We're talking apples and oranges if you compare the two.
Steve Feinman
Thu, Aug 20, 2009 : 10:25 a.m.
The FDIC fee is the cost of doing business, just like paying for utilities. It is a necessary cost to protect the depsoitors in case the banker display excessive exhuberance or take foolish risk. Of course, bankers never take foolish risk, nor do they link pay to short term performance
darthzero
Thu, Aug 20, 2009 : 9:42 a.m.
If United Bancorp didn't have to pay FDIC premiums, they would only have had a loss of $4.46 million for the first half of the year, compared to their current $5.46 million loss. If you think customers are crying about depressed earnings and they partially blame FDIC insurance premiums, ask yourself this question: How many of those customers would stay if United Bancorp wasn't FDIC insured? How many shareholders would be happy about that??
a2grateful
Thu, Aug 20, 2009 : 8:44 a.m.
"Is there a Customer crying about Depressed Earnings?"... Shareholders are certainly disheartened. Many small community banks have many small shareholders. These types of banks are important to the banking system. Typically, these banks did not participate in the sub-prime shenanigans that drove the big banks into the ground. However, they now pay insurance premiums to fund the bailout. In numerous cases, the insurance premium is the difference between red and black ink.... Well, one might say, shareholders are not customers. Actually, they are. Shareholders may be a bank's best customer. They lend money to the bank in terms of investment and deposits. They are typically the best customers of a bank, as evidenced by loyal support AND use.... Retail customers have definitely felt the pinch in terms of the credit crisis. Although residential lending may have resumed, commercial lending is tightly restricted, for practically all commercial customers in the State of Michigan. Pain here is deep.... Depressed earnings can be related to depressed economic vitality. Think not? Go apply for a loan for a small business startup and see what success you will have in borrowing money. Do you have an existing business and need to borrow against your receivables to meet payroll? Good luck in using bank funds to sustain your small business and entrepreneurial endeavor. Do you need to borrow money to purchase retail inventory? Funds are scarce for retailers. Maybe you don't care; except you go to your favorite store and find that they barely have any inventory; or their doors are closed for good. Ouch.... In essence, I believe every customer is crying in some way about depressed earnings: whether it is their own, a bank's, an area business, a retirement fund, a government entity, etc. Who is immune to the economic pain we all feel right now?... So, the short answer to the question is, "Yes, many customers are crying about depressed earnings."
REBBAPRAGADA
Thu, Aug 20, 2009 : 7:50 a.m.
WHAT IS THE EQUATION? What is the relationship between FDIC Premiums and the Earnings of Bank CEOs? Bank earnings are getting depressed and the UNTOLD story is; "The Earnings of Bank CEO would not get Depressed." Is there a Customer crying about Depressed Earnings?