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.
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 email@example.com.