ABA Banking Journal - November 2009 - (Page 16)
Community Banking Pass the Aspirin The Headache Preparing for FDIC’s Prepaid Insurance Assessments Fall’s FDIC news wasn’t pleasant—a worsening picture for the fund and a proposal to seek pre-paid insurance assessments, in December. Aspirin prescribers were asked how they planned to pay the bill. cannot be loaned to our customers. Remedy 3 Steve Goodenow, president, Bank Midwest, Spirit Lake, Iowa, $539.1 million. We have been in a very liquid position over the past 15 months. We will use funds that are earning overnight rates and send them off to FDIC. Over the next several years, we anticipate that we will have lower earnings on a pretax ROA basis as we continue to absorb the impact of substantially higher FDIC insurance premiums as they are expensed. We have discussed the need to try and pass some of the costs of replenishing the Deposit Insurance Fund to our depositors and borrowers through spread enhancement strategies that would impact both sides of the equation. In a normal competitive market, this will have its own challenges. Remedy 1 Cynthia A. Mahl, executive vicepresident and CFO, Western Reserve Bank, $192.5 million, Medina, Ohio Our prepayment will be just under $1 million. The opportunity cost in the first year will be $52,500 (assuming it could be loaned at 6%). That’s real money! That’s not to mention the $1 million impact on our liquidity, which is a hot regulatory topic these days, too. Remedy 2 Frank L. Carson III, president and CEO, Carson Bank, $81.4 million, Mulvane, Kan. As I understand the proposal, we would “capitalize” it, so to speak. In other words, we would list it as an asset on our books, “FDIC Prepayment.” The payment would come from our cash, but is not an immediate expense. We would amortize the new asset quarterly, which is the amount of our FDIC assessment, reducing the new asset by the cost of that assessment. (A prepaid expense shows as an asset and is amortized, a regular asset is depreciated.) The effect is that our cost of the FDIC prepayment would be like booking a nonaccrued loan. So it would cost us in our Return on Assets (ROA). This is in comparison to the government’s cost of money if the funding were to come from the line of credit that was set up with the Treasury. FDIC says there is plenty of liquidity in our system, so it can just be paid for out of liquidity. But in fact it is our cash that Remedy 4 Dane Cleven, chairman and president, Community Savings Bank, $403.9 million, Chicago, Ill. We have sufficient liquidity to just pay it in, if that is what it comes down to. Remedy 5 Frank Campbell, president and CEO, Pilgrim Bank, $160 million, Cohasset, Mass. The bank will pay for the FDIC prepayment using existing liquidity. Deposit growth and increased loan payoff activity has created a temporary excess of investable funds. Of concern, however, is the opportunity cost associated with such a large prepayment, as well as the growth factor and deposit insurance premium increase to be built into the calculation. We would prefer to see quarterly adjustments for increased/decreased deposit activity during the period, as well as the calculation for any future premium increase after it becomes effective. 16 NOVEMBER 2009/ABA BANKING JOURNAL Subscribe at www.ababj.com
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