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Local banks take major hit

Financial institution forced to pay heavy assessment fees

Posted: February 28, 2009 1:55 a.m.
Updated: February 28, 2009 4:55 a.m.
 
Skyrocketing federal insurance due to a cascade of bank failures will cost Bank of Santa Clarita an unexpected $400,000 the bank president said Friday.

Because of the depleted Federal Deposit Insurance Fund, federal regulators on Friday raised the fees paid by U.S. financial institutions and levied a hefty emergency premium in a bid to collect $27 billion this year.

"All of the Wall Street banks created this mess, and (community banks) and ultimately the consumer, not to mention the taxpayer, are going to pay the price," said Jim Hicken, president of Bank of Santa Clarita.

The Federal Deposit Insurance Corp. now expects bank failures will cost the insurance fund around $65 billion through 2013, up from an earlier estimate of $40 billion.

The Bank of Santa Clarita faces an assessment of some $460,000 this year, a gargantuan leap from 2008's $68,000, Hicken said.

The bank failures, 14 already this year following 25 last year, reflect the ravages of rising unemployment and falling home prices that sent loan defaults soaring.

The industry's biggest trade group said the new insurance fees would place an extra burden on the nation's banks and thrifts, and suggested regulators could reduce the premiums if their economic assumptions end up being overly severe.

But the blow will be massive for small, fiscally responsible banks.

"The majority of community banks are doing well," Hicken said. "We're bullish in the sense that we're still lending money."

Established in 2004, the bank planned to expand to three branches with the March 12 opening of its office at 19045 Golden Valley Rd.

Hicken learned of the FDIC's new one-time assessment Friday, and said he was shocked.

When the Bank of Santa Clarita opened in 2004, he said the FDIC levied no assessment.

As a result of the new fees, he said the bank has put a hiring freeze in place.

For the time being, Hicken said layoffs will not be necessary.

He said Friday's announcement does not take into account the flexibility the FDIC has to charge an extra quarterly assessment of 10 cents per $100 on deposit.

Bank customers nationwide will eventually see an increase in fees, he said.

"Banks will have to raise costs," he said. "It trickles down.

"I think it's very uncertain how deep this problem is going to get."

The FDIC board said the economic crisis, which has caused the insurance fund to drop to its lowest level in nearly a quarter-century, also warranted extending the plan to rebuild the insurance fund from five years to seven.

"We're taking steps today to ensure that the deposit insurance system remains sound," FDIC Chairman Sheila Bair said at a board meeting to vote on the changes. "These steps are necessary because banks - and not taxpayers - are expected to fund the system."

But the head of the Office of Thrift Supervision, in his final day in that position and as one of the FDIC board members, voted against the emergency premium. John Reich said the fees would unfairly burden smaller banks that didn't contribute to the financial crisis with reckless lending.

"Taxing the banking industry with a special assessment of this magnitude, when they are already under siege, will have a negative impact on their lending capacities," Reich said.

Bair said the plan protects bank depositors - by safeguarding the fund that insures regular accounts up to $250,000. Taxpayers also are protected because it likely means the FDIC will not have to go to the Treasury Department and tap public money to replenish the insurance fund, she added.

Bair has not ruled out that possibility for a short-term loan, but said she doesn't expect to take the more drastic action of using its $30 billion long-term credit line with Treasury - something that has ever been done.

"Treasury exists for contingencies and should not be relied upon for planning purposes," Bair said Friday. "If we were to turn to taxpayers to cover fund losses, this could open up a whole new debate about the degree of government involvement in the affairs of insured banks."

The FDIC plan puts new charges on a battered industry while the Obama administration is seeking to pump as much as $750 billion in additional federal aid into ailing banks under its financial rescue plan.

The FDIC, as a regulatory agency charged with protecting the insurance fund, acts independently from the administration.

The agency's new plan includes changes to the system of assessing regular insurance premiums that officials said are designed to shift the greater burden to the banks with riskier lending practices.

The new emergency premium, to be levied on the roughly 8,500 federally insured institutions on June 30, will be 20 cents for every $100 of their insured deposits. That compares with an average premium of 6.3 cents paid by banks and thrifts last year.

In addition, the FDIC raised the regular insurance premiums for banks to between 12 and 16 cents for every $100 in deposits starting in April, up from a range of 12 to 14 cents.

The increases "are very significant and will pose an extra burden on every bank," Edward Yingling, president and chief executive of the American Bankers Association, said in a statement. "However, the industry is committed to maintaining the strength of the deposit insurance fund."

"We remain optimistic that FDIC's cost projections over the next few years may be too high, particularly given the significant economic stimulus that Congress recently set in motion," he said. "Should its projections prove to be too conservative, we would certainly hope the FDIC would immediately move to adjust premiums downward so as not to further restrict bank resources."

The law requires the insurance fund to be maintained at a certain minimum level of 1.15 percent of total insured deposits. But it fell below that minimum in mid-2008.

Twenty-five U.S. banks failed last year - including two of the biggest thrifts - more than in the previous five years combined and up from only three failures in 2007.

The failures sliced the amount in the deposit insurance fund to $18.9 billion as of Dec. 31, the lowest level since 1987. That compares with $52.4 billion at the end of 2007.

The FDIC reported Thursday that U.S. banks and thrifts lost $26.2 billion in the last three months of 2008, the first quarterly loss in 18 years, as the housing and credit crises escalated. Banks also more than doubled the amount they set aside to cover potential loan losses, to $69.3 billion in the fourth quarter from $32.1 billion a year earlier.

The agency said there were 252 banks and thrifts in trouble at the end of 2008, up from 171 in the third quarter.

Two of the biggest bank failures in the nation's history occurred last year and involved thrifts.

Pasadena, Calif.-based IndyMac Bank collapsed in July and cost the federal deposit insurance fund $10.7 billion and Seattle-based Washington Mutual Inc. was the largest U.S. bank failure ever. WaMu fell in September, with around $307 billion in assets, and was acquired by JPMorgan Chase & Co. for $1.9 billion in a deal brokered by the FDIC.

Thrifts are important to consumer lending because they must have at least 65 percent of their lending in mortgages and other consumer loans, but that also has made them especially vulnerable to the housing downturn.

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