Community bankers have many reasons to be pessimistic about 2009. A recessionary economy, a sagging commercial real estate market and deteriorating housing and construction sectors are just some of the hurdles. In addition, bankers face the added pressure of the Federal Deposit Insurance Corporation raising the risk-based assessment rates in order to restore the Deposit Insurance Fund (DIF).
Many in the industry - especially those at smaller institutions - have bristled at the ruling, arguing the agency is sapping their ability to lend at a critical juncture, says Karen Thomas, evp of government relations for the Independent Community Bankers of America. "One of our greatest concerns is that the higher premiums will take money out of local communities," she says. "In other words, the banks will have less money to lend and it's critical at this time in the economic cycle to make sure that banks keep lending in order to promote economic activity."
As of Jan. 1 the new assessment annual rate rose from between five and 43 basis points to between 12 and 14 basis points for Risk Category I institutions and up to 50 bps for Risk Category IV institutions, according to the FDIC. "With higher levels of bank failures, the FDIC's resolution costs have increased significantly," said FDIC chairwoman Sheila Bair in a statement. "This assessment increase creates a path for the fund to return to its statutorily mandated level."
By June 2008 the fund had dropped to 1.01 percent, 0.14 below the legal limit, after hovering at just under 1.20 three months earlier, according to the FDIC. After the fund fell to 1.01 percent, the Federal Deposit Insurance Reform Act of 2005 required the FDIC to establish a plan (which the Board adopted on Oct. 7) to return the fund to 1.15 percent within five years, in this case by 2013.
Also of concern to the FDIC, there were 25 bank failures in '08 that cost the insurance fund almost $20 billion, according to the agency, and there are over 100 institutions on the FDIC's troubled-bank list. The fund's beginning balance for 2009 is almost $30 billion.
Terry Jorde, who is president and CEO of Cando, ND-based CountryBank USA, says that her bank's premiums will spike over 80 percent this year due to the new rates and the fact that they will not be receiving its one-time assessment credits toward the fee. These credits were given to banks based on how much money they had contributed to the DIF prior to 2006 (of note, most of these credits have dried up).
"Without this additional [rate hike on the] assessment we would've been looking at a significant increase in 2009 anyway just because the credits have run out," she says. "So we not only lost the credits but we're looking at double what the assessment would be. So in my case I will go from paying about $7,000 in 2008 for FDIC insurance to about $50,000 in 2009. That's a huge impact on a $45 million [asset] bank."
Jorde is hardly alone in her sentiment. "When community banks start factoring in credit quality, delinquency ratios and loss ratios and different products, it will cause banks to re-analyze whether they want to continue funding those segments of the markets based on the additional FDIC insurance premium adjustment factors," says CorTrust Bank CEO Jack Hopkins, whose Mitchell, SD bank has $530 million in total assets.
He also notes that more than 20 percent of banks in the nation lost money in the third quarter of 2008 (with fourth quarter numbers still forthcoming), "and all this is doing is exacerbating those losses. Community bankers are being forced to pay at a time when there have been things that are outside of a bankers' control causing losses: anything from losses on Freddie and Fannie preferred stock to write downs of different investments that were previously investment-grade investments," Hopkins says.
Much of the ire from bankers comes from the fact that the FDIC doesn't seem interested in extending the five-year restoration period to six - or more - years, thus, lowering the cost to banks this year. The 2005 reform act gives the FDIC such flexibility under "extraordinary circumstances," so considering that this is the greatest financial crisis the industry has faced since perhaps the Great Depression, community bankers argue that qualifies as "extraordinary."
However, in a memo from FDIC's director of insurance and research division, Arthur Murton, to the agency's Board of Directors, he wrote, "[I]t would be premature to conclude at this time that extraordinary circumstances should warrant extending the Restoration Plan horizon beyond five years," Murton says. "There is considerable uncertainty about future insurance fund losses and insured deposit growth."
Besides the timing and the size of the increases, community bankers are also angry because they contend they did not get the banking system into this mess. While more than 15 of the 25 failed banks in '08 came from Main Street, they only made up a fraction of the cost to the DIF when compared to IndyMac and Washington Mutual. Many community bankers would like to see those too-big-to-fail banks be the ones paying the vast brunt of the fund. "They are the ones who have depleted this fund, for all intents and purposes; the Wamus and IndyMacs of the world, it was not the community banks of the world, whose balance sheets are made up strictly of deposits and loans," says Hopkins.
Jorde calls the whole situation discouraging and frustrating. "It isn't right; it's not the way insurance is supposed to work," she says. "The people that are creating the most risk are the ones that are supposed to be paying the highest premiums. What's really happened in the system that we have right now is that the banks like mine, that didn't take the undue risks, are having to pay the cost."
Murton's FDIC memo did offer a sliver of hope for bankers that want changes. He said since the board meets on a semi-annually basis, they could reconsider their decision and make adjustments at a later time.
Among the rulings that the ICBA would like reviewed for the second quarter is for the agency to remove brokered deposits for banks under $10 billion in assets from the risk assessment analysis or, at minimum, raise the threshold ratio of brokered deposits to domestic deposits from 10 percent to 25 percent, says ICBA's Thomas.
They would also like to see the FDIC change its definition of "rapid asset growth" from 20 percent over four years - which about 50 percent of community banks achieved, says Thomas - to 40 percent over the same span. Also, if they keep the brokered deposit ruling, that Certificate of Deposit Account Registry System (CDARS) deposits aren't included as a brokered deposit.
In addition, the ICBA would like the FDIC to increase the secured liabilities to domestic deposits (of which include Federal Home Loan Bank advances) ratio from 15 to 30 percent. Finally they want the FDIC to "impose a systemic risk premium on too-big-to-fail institutions."
Hopkins also adds that he would like to see the deposit insurance fund based on the assets of an institution, which would be more burdensome on larger banks that deal in more complex products, rather than deposits. "I think those that have created this problem, a lot of it has been done through their asset quality and off-balance-sheet liabilities versus their deposits," he says. "I think deposits are a poor measure of the risk of a bank."
Yet not all community bankers are upset with the FDIC's move. James Holly, who is the founding president and CEO of Porterville, CA-based Bank of the Sierra, believes that the two most important regulations made by the government last year were the establishment of Treasury's Trouble Assets Relief Program (TARP) and the increased levels of deposit insurance, with the latter being the "single most important, most compelling step that the government took" to quell customer anxiety, says Holly, who has 44 years of banking experience.
Ironically, Bank of the Sierra, which has $1.3 billion in total assets, did not participate in TARP. Holly says the bank will pay between $1.1 million and $1.2 million in additional insurance due to the new assessment rates.
"It's one of those tradeoffs," Holly says. "We have increased insurance levels but we have to pay for it. But I'm not terribly upset with the increased assessment rate; it's a nice tradeoff."