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The higher premiums that banks will begin paying this year for deposit insurance are much like high gasoline prices: Nobody likes to pay more, but the insurance fund is a necessity no bank can operate without.

And just like $4-a-gallon gas broke drivers’ budgets last summer, the higher assessments required by the Federal Deposit Insurance Corp. (FDIC) are going to put a further strain on Iowa banks’ profitability.

“It’s a big line item, a big expense,” said Tom Stanberry, president and CEO of West Bancorporation Inc., the holding company for West Bank in West Des Moines.

Based on its current level of deposits, West Bank would pay more than $780,000 in additional premiums this year with the increase. Stanberry, who is also the chairman of the Iowa Bankers Association, said most bankers he has talked with agree with him that the increase is fair, however.

The premium increase is part of the FDIC’s five-year plan to recapitalize the Deposit Insurance Fund (DIF), which now insures each depositor’s funds up to $250,000 in the event of a bank failure. The fund has declined from 1.19 percent of deposits as of March 30, 2008, to 0.76 percent as of Sept. 30. The higher assessment revenue is expected to increase the reserve ratio gradually beginning this year, to reach 1.26 percent by the end of 2013.

An expected increase

Currently, banks pay between 5 and 43 basis points of their domestic deposits for FDIC insurance. With the change, risk-based rates will increase by 7 basis points (7 cents for each $100 in deposits) in the first quarter, increasing them to between 12 and 50 basis points (annualized) for the first-quarter 2009 assessment. Most well-capitalized institutions will be charged between 12 and 14 basis points.

For Iowa banks, which hold approximately $60.1 billion in deposits, the 7 basis-point increase means they would pay $42 million in additional premiums in 2009. Changes are also planned beginning in the second quarter that will further adjust the premiums based on additional risk factors associated with each bank, including how fast its deposits have grown over the past four years and the level of advances it has taken out from the Federal Home Loan Bank.

“The increase in premiums was certainly expected with the economic times that we’re in,” said John Sorensen, Iowa Bankers Association president and CEO. “We’ve seen a pretty significant drop in the fund as a percent of overall insured deposits.”

In the third quarter of 2008, the DIF decreased by 23.5 percent ($10.6 billion) to $34.6 billion. The reduction in the DIF was primarily due to an $11.9 billion increase in loss provisions for bank failures, which represents the estimated losses for FDIC-insured institutions that are likely to fail over the next 12 months. No Iowa banks were among the 41 that failed last year.

Industry obligation

Having a secure reserve fund is important for the banking industry and consumer confidence, Sorensen said. “It has always been fully funded by the industry; we feel we have an obligation to continue that,” he said.

The new formula will keep premiums higher during good economic times to avoid sharp swings in the future. “One thing we’re trying to do is not have the wide variation in premiums,” Sorensen said.

Additionally, if the FDIC makes permanent the $250,000 deposit coverage limit, which it increased in October from $100,000, premiums will have to be further adjusted, he said. The increase in FDIC protection is expected to expire at the end of this year.

“In practicality, most of us believe that won’t expire, that it will continue at that level,” Sorensen said. “So that could kick in at a future time to increase the cost of coverage. What’s interesting is that if you would have indexed (the $100,000) to inflation, it would be about $260,000. So the increase to $250,000 really gets you back to where we were in 1980.”

The Iowa Bankers Association supports a recommendation of several national banking associations that the FDIC should use its emergency powers to extend the replenishment period for the DIF from the statutory five years to seven.

“Doing that would mean additional dollars to serve our communities, and to extend credit to businesses and consumers,” Sorensen said.

An estimated 80 percent of U.S. banks have been able to reduce or eliminate their assessments over the past several years by applying credits the FDIC has issued because there had been so few bank failures. Now, as the reserves are being used, those credits are running out.

Like many banks, West Bank has paid little to no premiums since the late 1990s because of the credits the surplus provided them.

“We knew this was coming, but still, to go from (paying) nothing to 12 basis points is quite a hit,” Stanberry said.

Tom Miller, president of Polk County Bank in Johnston, said there’s not much a small community bank like his can do about the increase.

“The FDIC assessment for a bank is one of those costs of doing business,” he said. “If we want to be a bank, we have to pay it.”

Miller said it’s unlikely that the higher premium expense would cause his bank to increase fees or lower the interest rate it pays to mitigate the cost.

“Though it’s a large number, we have a lot of other expenses that are a lot more than what our FDIC expenses are,” he said. “Our organization looks at it on a more holistic view.”