Banks grapple with FDIC spikes
Photo/Michelle Hammarstrom
Yellow Light Breen, Bangor Savings Bank's senior vice president, says healthy banks are paying for the mistakes of other banks.
For several years leading up to 2007, Bangor Savings Bank paid no insurance premiums to the Federal Deposit Insurance Corp. But last year it paid about $1.4 million, and this year the bank forked over around $3.1 million.
The Bangor bank is not the only one facing escalating costs for insurance to protect deposits. Bath Savings Institution in 2008 paid the FDIC just $101,000, but this year was hit with a fee of more than $600,000. And Northeast Bank in Lewiston has paid $719,000 so far this year to the government agency that insures the banking industry.
These steep payments to the FDIC, which currently insures account deposits up to $250,000, have come after a wave of bank collapses across the country. In 2008, 25 banks closed — up from three in 2007. So far this year, another 81 banks have folded, with hundreds more in serious trouble. The FDIC does not
reveal the names of troubled banks, but it recently issued a cease-and-desist order to Augusta-based Border Trust Co. And the federal Office of Thrift Supervision issued a cease-and-desist order to Gardiner-based Savings Bank of Maine for having insufficient capital.
Since 2008, the FDIC has spent more than $32.3 billion to cover accounts, according to an FDIC spokeswoman. To increase its dwindling reserves used to safeguard deposits, the FDIC board earlier this year passed a seven-year restoration plan to boost its insurance fund, asking for huge checks from the 8,100 or so financial institutions that pay into it.
“Like any kind of insurance, at the end of the day, the healthy policies have to cover the unhealthy policies. You have to spread the risk,” says Yellow Light Breen, a senior vice president at Bangor Savings Bank. “At the end of the day, when there have been catastrophic failures in the industry, the healthy banks’ premiums go up.”
The FDIC must keep its reserve ratio — or what it holds compared to what banks have in deposits — between 1.15% and 1.5% according to federal statute. By March 31, it was hovering around 0.27%, at $13 billion. In the second quarter, the agency’s insurance fund fell even further to $10.4 billion, the lowest since 1992; it was at $45.2 billion a year earlier.
To amend this, the FDIC recalculated its annual charge for banks — which is based on criteria such as a bank’s deposit assets, as well as risk — and instituted an extra emergency assessment fee that will raise $5.6 billion by Sept. 30, according to the FDIC.
The new FDIC fees affect Maine banks differently. Bath Savings Institution paid just under $400,000 this year for its baseline rate, and $232,000 for the special assessment. Northeast Bank paid $275,000 for the special assessment fee, while its regular annual payment this fiscal year was $444,000, a $150,000 increase over last year.
“It’s never fun in any business when you’re managing it to be told about an unexpected expense,” says Jim Delamater, president of Northeast Bancorp. “I’m sure banks across the country said, ‘Oh this is lovely, we have to pay for other people’s sins.’”
But all the bankers interviewed for this story were quick to add that they benefit from the confidence the FDIC instills in their customers. Still, it rankles them that while they stayed away from the risky lending that doomed other financial institutions, they now have to pay “the price of bank failures in other places,” as Breen puts it.
Absorbing the costs
While most bankers insist they will not pass these costs on to customers, Chris Pinkham, president of the Maine Association of Community Banks, says the high premiums could inhibit banks in other ways. “It’s not like that money comes magically from some place, we still have to pay depositers and pay taxes,” he says. “It comes out of things that let a bank grow, or charitable contributions, what they do in the community, or whether they can grow with employees.”
But healthy banks should not see their growth hindered by the sharp increases in premiums. “We’re very fortunate,” says Glenn Hutchinson, president of Bath Savings Institution. “Across the country there are many institutions where [the FDIC premium] is sort of the difference between earning and no earnings.” He adds that profitable banks will be able to fold the fees into the normal costs of operation. “We’re simply paying them. We’re not passing them on directly to customers,” he says, adding that it’s helpful that Bath Savings Institution’s earnings are up between 15% and 18% this year over last. “But as costs rise, we need to make that up somewhere.”
The market does not give banks much flexibility other than to bear the brunt of the insurance costs. “The marketplace does in some ways set the ceiling and floor on fees,” Pinkham says.
Breen says the way to manage these higher insurance costs is to “look at the whole picture.” At the end of 2009, Bangor Savings, which last year had over $70 million in expenses, could pay a total of $4.1 million to the FDIC. “You look at everything going on in your business; you look at health insurance premiums; you look at what you’re doing for technology expenses. You have to decide on loan customers … You put together the best budget you can,” he says.
Bangor Savings is in a good position, too, to absorb the premiums, Breen says. The bank just posted its best quarter in its history for home mortgages due to a burst of refinancing activity and first-time home buying. Breen, though, is realistic that these trends won’t continue. “We’re just trying to manage the business in a prudent, long-term way. We try to create a business that can offset anything that might come down the pike,” he says.
These premiums actually follow a lull — or rather, a period of economic stability — in which many Maine banks got an FDIC reprieve. Between 1996 and 2006, the best-rated and best-capitalized banks — which included more than 90% of the banking industry — did not pay any deposit insurance because its reserves were big enough to fall comfortably within the reserve-ratio requirement, according to the FDIC.
Meanwhile, as the banking industry struggles to right itself, the FDIC warns that it could impose more emergency assessment fees before the end of the year.
“Our bank is budgeting for the future, because the cost will likely not go down,” Delamater says.
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