WASHINGTON The fees banks pay to the Federal Deposit Insurance Corp. for a guarantee on deposits often a source of angst among bankers and their representatives have suddenly become an example of earnings strength.
The level of FDIC premiums is always an issue for the banking industry, especially as the agency seeks to rebuild insurance reserves following the crisis. But several institutions are now pointing to their falling premiums as a sign of balance-sheet strength and a key factor behind lower noninterest expenses in the third quarter.
"Expense control continues to be a major focus for management and we continue to reduce our fixed costs each quarter. It is especially gratifying to have significantly lower FDIC premiums, reflecting the improvement in State Bank's asset quality and risk profile," Mark Klein, chief executive of SB Financial Group, which owns the $630 million-asset State Bank and Trust Co. in Defiance, Ohio, said Monday in the company's third-quarter earnings report.
Current aggregate figures for FDIC premiums are hard to pinpoint in part because banks do not always disclose assessments totals, which can reveal internal supervisory information.
But all signs point to widespread reductions as institutions' continued recovery affects the complex risk-based calculation the FDIC uses to assess fees, which relies on everything from Camels ratings to a bank's levels of risky loans.
In its earnings report Wednesday, Hudson City Bancorp, which owns the $39 billion-asset Hudson City Savings Bank in Paramus, N.J., said its 16% decline in noninterest expenses from a year earlier to $78.5 million was largely due to an $11.4 million decrease in deposit insurance fees.
Some of the biggest banks also cited a decline. Bank of America and Wells Fargo both attributed lower noninterest expenses to reduced FDIC premiums. The third-quarter statement for Wells showed a 40% decrease in third-quarter premiums, compared with a year earlier, to $214 million.
"Noninterest expense declined $342 million, or 5 percent, from a year ago largely driven by the elimination of costs related to" regulatory foreclosure reviews, "lower operating losses, and lower FDIC deposit insurance assessments," Wells Fargo said.
The FDIC's second-quarter report on the industry's health had showed the FDIC earning just over $2.5 billion, a more than 4% decrease from the prior quarter. It was the second straight decline and the lowest total since the first quarter of 2009.
"The [FDIC's] revenues are going down because the banking system is rebuilding its capital structure and becoming less risky," said Robert Eisenbeis, the vice chairman and chief monetary economist at Cumberland Advisors.
But whether the falling rates have any effect on the FDIC's management of the Deposit Insurance Fund is unclear.
Rates are still elevated as the agency faces a 2020 statutory deadline for the DIF to hold 1.35% in equity relative to the nation's total insured deposits. The fund's reserve ratio at the end of last quarter was 0.63%. Growing portfolios could also boost overall assessments since a bank's rate is multiplied by its total liabilities to calculate its overall premium.
The agency noted the reduced premium rates in an update on DIF projections earlier this month, saying the reduction was larger than expected. While projected assessment earnings for the year are about $10 billion, down from an earlier projection of $11 billion, officials did not sound concerned. Still, the FDIC extended its projection for the reserve ratio hitting 1.15% by a year to 2019.
Officials have not signaled any change in the general rate schedule a scale of rates that the FDIC board can alter to address the agency's funding needs and industry observers do not believe a change is forthcoming. Despite the rate reductions, the DIF benefits from projected lower amounts of bank failures, which allow the agency to move loss reserves back into the fund. (Most banks pay within a range of 2.5 and 9 cents per $100 of assets minus equity.)
"There is no doubt that there will be continued improvement and more [supervisory] upgrades in the future, which will reduce the premiums they receive from the industry," said James Chessen, the American Bankers Association's chief economist. "I don't know if that affects much the FDIC's calculations because they have also been recapturing reserves from banks that they projected would fail but that didn't."
"When they recapture those reserves it builds up the fund faster. So there is not really a change to their projections and they should still easily meet their 2020 statutory projections for the fund."
In addition to reductions in risk-based premium rates, the industry overall has benefited from the FDIC's refunding nearly $6 billion in prepaid assessments that the agency had collected during the crisis to deal with its sharply rising funding needs.
In the third quarter, some institutions that still grew their balance sheets indicated they benefited from a lower premium rate.
Robert Sarver, the chairman and chief executive of Phoenix-based Western Alliance Bancorp, which owns three banks totaling over $8 billion in assets, said in an earnings call that the company essentially saw its premiums unchanged despite taking in more deposits.
"The reason why you didn't see a step down as much is because the deposit growth was strong and we think the deposit growth is going to remain strong," he said, according to a transcript. "So, again, I'm not sure that you're going to see that expense line fall, but you will see an increased balance sheet with really no increase necessarily in deposit insurance premiums."
Monte Redman, the president and chief executive of Astoria Financial Corp., which owns the $16 billion-asset Astoria Federal Savings and Loan in Long Island City, N.Y., projected about a 15% reduction in its premiums for the whole year. "Last year our FDIC insurance was about $47 million," he said in an earnings call, according to a transcript. "This year we should be under $40 million and we're continuing to work on all the components to improve it."