A plan to lower deposit premiums at most small institutions still has some bankers bracing to pay more and bristling at the suggestion that they are dealing in risky businesses.
The Federal Deposit Insurance Corp. has proposed changing the calculus for assessing premiums at banks with less than $10 billion in assets. But the plan would penalize banks with concentrations in areas such as construction or commercial-and-industrial lending.
While the industry's trade groups have refrained from taking positions on the proposal, a contingent of community bankers view the proposal as a bitter pill to swallow. Some industry experts also believe the plan could force some banks to rethink their asset concentrations.
"I think it should be a much broader evaluation of the bank," said Ronald Paul, chairman and chief executive at the $5.5 billion-asset Eagle Bancorp, asserting that focusing on loan types overlooks the importance of credit quality.
Construction loans account for 16% of total assets at the Bethesda, Md., company, compared to a 4% industry average.
"We'll take the heat," said Rusty Cloutier, president and chief executive of MidSouth Bancorp in Lafayette, La., where C&I loans make up about 24% of the company's $2 billion in total assets. "We'll try to explain to our shareholders why we have to do this foolishness, and then move on with life."
The FDIC's proposal comes as the types of loans that wreaked havoc during the financial crisis have begun to make a comeback at smaller banks.
Construction loans increased by 15% in the first quarter, compared to a year earlier, to $85 billion, according to the FDIC's quarterly report on community bank performance.C&I loans rose by 10%, to $190 billion.
Construction lending is an important business for many fast-growing banks. For instance, Bank of the Ozarks in Little Rock, Ark., an aggressive consolidator in the Southeast, and Live Oak Bancshares, in Wilmington, N.C., which is gearing up for an initial public offering, have concentrations that top 20%.
Representatives for Bank of the Ozarks and Live Oak declined to comment.
The FDIC's proposal would change how the agency calculates deposit insurance premiums, with the broader goal of making risky banks pay more and safer banks pay less.
The agency last modified its assessment system in 2007. The latest proposal incorporates data from the more than 500 small-bank failures that took place following the 2008 crisis, the FDIC said.
"What the FDIC is doing is trying to better allocate risk," said Bimal Patel, a financial services lawyer at O'Melveny & Myers and a former senior adviser at the FDIC.
The proposal tweaks the formula for estimating and pricing risk. It looks at factors that, the FDIC said, have played an outsized role in causing prior bank failures, including the composition of a bank's loan book.
The new model includes a "loan mix index" that measures a bank's concentration in categories of loans that had high chargeoff rates during previous downturns. C&I and construction loans were given the highest weight in the index, indicating the most risk. Agricultural loans were assigned the lowest weight.
The formula also takes into account a range of other factors, including core deposits, asset growth and supervisory ratings.
"I think this is the first attempt by the FDIC to start predicting failure rates in premiums," said Chris Cole, senior regulatory council at the Independent Community Bankers of America, describing the plan as "forward-looking."
The proposal would go into effect the quarter after the Deposit Insurance Fund reserve ratio hits 1.15%. That's projected to occur in late 2016 or early 2017, an FDIC spokesman said.
Most community banks would benefit from the plan. If implemented, it would lower premiums for 60% of those banks, while premiums at another 20% would remain flat, the FDIC said.
For the remaining banks, premiums would rise and by a potentially significant amount.
"The object of the rule is to be revenue neutral," Patel said. "That means that the ones who end up paying more could pay noticeably more."
One possible outcome of the FDIC's proposal is that small banks could scale back construction lending, industry experts said.
The potential for scaling back "concerns us, but we're going to have to wait and see," before taking a position on the plan, Cole said, adding that the ICBA is in the process of gathering responses from its members.
Some bankers said they have no plans of changing course.
"We're not going to change our model because of the government," Cloutier said.
The new formula is based on an assumption that loans that have caused problems in the past will continue to remain risky, industry experts said.
"I think the risk there might be that history doesn't always predict the future," Patel said. "The next crisis may not look like the last crisis."
So far, the proposal has failed to generate a widespread industry response.
Several banks contacted for this story did not respond, or they declined to comment. The FDIC declined to comment, citing the ongoing rulemaking process.
Industry reaction will likely be "muted" because, under current regulations, assessment rates are already set to decline when the reserve ratio reaches 1.15%, Cole said.
Still, some bankers expressed skepticism about the long-term effects of tweaking the underlying formula for insurance assessments.
"The most harm is done by the people with the best intentions," Cloutier said.