How PremiumRefunds Are Deployed Speaks Volumes

As third-quarter earnings unfold, the manner in which banks use their federal deposit insurance refunds has been a key indicator of relative strength.

"It's a revenue growth issue," said Sanford C. Bernstein analyst Moshe Orenbuch. "A bank's propensity to let the refund flow through to the bottom line is inversely related to its ability to generate revenues."

The Federal Deposit Insurance Corp. had voted in August to cut the assessment for "well-capitalized" banks from 23 cents to 4 cents per $100 of insurance deposits.

The action was required since the agency's bank insurance fund had reached its statutory reserve goals.

With FDIC rebates received for the month of June and the entire third quarter, banks were granted an additional measure of flexibility in how they chose to report earnings.

"If you have a bank that is going to meet or exceed Wall Street expectations without taking their FDIC benefits, they will do just that. They'll bury the benefit, maybe through offsetting expense charges, and save it for a rainy day," said Thomas F. Theurkauf Jr., with Keefe, Bruyette & Woods Inc.

"At the other end of the spectrum, banks that are particularly hitting the revenue wall or having difficulty growing earnings will take the full benefit," Mr. Theurkauf added.

Banks in the latter category included Compass Bankshares, Birmingham, Ala.; New Jersey's First Fidelity Bancorp., and Shawmut National Corp., Boston. All of these companies are struggling with sluggish revenues and used the refund to reduce expenses and thereby boost earnings.

By contrast, Jacksonville, Fla.-based Barnett Banks Inc., which is enjoying robust consumer-led loan growth, plowed all of its $18 million of FDIC savings into technology and marketing investments.

"Those banks that are seeing strong revenue growth and dynamic fee and loan gains generally are reinvesting it," said Dean Witter's Anthony R. Davis.

A few other banks, such as Norwest Corp. and BayBanks Inc., took a third approach. Uncertain about how much the banking industry will be assessed next year to bail out the thrift insurance fund, Minneapolis-based Norwest placed its $21 million FDIC refund in a special $23 million reserve to cover those anticipated costs.

"The treatment of the four-month FDIC rebate and the treatment of the anticipated thrift insurance fund situation are kind of all over the map," said PaineWebber Inc. analyst Thomas D. McCandless

Some banks that previously disclosed their FDIC costs in billing corporate cash management clients now face a dilemma because of the refunds.

"They've got to give some money back to their clients, either in the form of the interest rate they give them for their compensating balances or in the cash fees," Mr. McCandless said.

"But that's usually a pretty small number," he added. "If it's a $20 million rebate, it's only about $2 million that goes back to corporate clients."

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