BRADENTON — Seeking extra cash to refill its insurance fund, the Federal Deposit Insurance Corp. on Tuesday ruled banks must prepay three years worth of insurance premiums by the end of the year.
The FDIC’s insurance fund faces a deficit as the federal agency expects bank failures to rack up an estimated $100 billion over the next four years.
The bank insurer has shut down 95 banks so far this year, up from 25 last year, and estimates it will collect $45 billion from the prepayments, according to fdic.gov.
The FDIC is fully backed by the government, which means depositors’ money is guaranteed up to $250,000 per account. But it would be the first time the agency has required prepaid insurance fees.
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Allen Langford, president and chief executive officer of Manatee River Community Bank, said he considers it a fair deal to pay premiums for 2010-12, plus the fourth quarter of 2009 by Dec. 30.
Langford said he’d rather his bank front the fees than be charged another special assessment.
In the second quarter of this year, banks paid a special assessment that added $5.6 billion to the insurance fund.
“I think it’s a good compromise,” Langford said. “We lose liquidity but it shows the banks are responsible for the financial security of the FDIC at a critical time for the FDIC.”
FDIC chairwoman Sheila Bair said the advanced payments will strengthen the position of the Deposit Insurance Fund as the liquid balances will be used to conserve capital and help maintain the capacity of banks to lend.
“The decision (Tuesday) is really about how and when the industry fulfills its obligation to the insurance fund,” Bair said in the news release. “This proposal is a vote of confidence for the banking industry’s resilience and will continue to recover its strength as we work through the significant challenges ahead.”
Bill Sedgeman, chairman of the board for Community Bank of Manatee, said he, too, favors the decision.
Sedgeman said that’s because the premiums are an asset when the payment is made and don’t become an expense until the quarter when the payment was originally due.
“It might be a little easier to pay it this way,” said Sedgeman, who estimates Community Bank’s insurance premium will total $600,000 this year.
Local banking consultant Frank Knautz said there are lingering details regarding the assessments.
According to Knautz, community banks’ insurance premiums are typically about $40,000 per quarter for every $200 million in deposits.
A bank that is considered troubled or under regulatory order could pay as much as three times that amount, Knautz said.
“If a bank is having some problems they very well could have a much bigger assessment,” Knautz said.
The FDIC states on its Web site the prepaid assessments for the fourth quarter of 2009 and all of 2010 will be based on each bank’s total base assessment rate for the third quarter of 2009.
However, Knautz said it’s not clear whether assessments will later be adjusted if the bank’s condition changes over the next three years.
“If a bank having a troubled condition now is charged a higher rate, and then next year they’re not troubled, are adjustments going to be made?” Knautz said. “We don’t know. There’s a lot of details to be resolved.” Charles Conoley, president and chief executive officer of Horizon Bank, is concerned about how the prepayment will impact his bank’s liquidity position.
“It will put a further drain on earnings and banks,” Conoley said.
Conoley estimates it will cost Horizon Bank $1.25 million to pay the premiums in advance.
“That’s a significant amount of money,” Conoley said. “For the community banks, it will take away from our liquidity position. You’re talking about a million dollars so that’s 15 percent of our liquidity position. You never know, a year from now you might want to have an extra million in the banks.”