Deposit Gathering in Hard Times: "Flight to Quality" Hasn't Occurred Everywhere, but a Higher Cost of Insurance Has. Banks Are Adjusting Tactics to New Rules of Engagement

[ILLUSTRATION OMITTED] They say timing is everything. The cliche certainly applies--in the negative sense--to the Federal Deposit Insurance Corporation's decision to levy a premium hike for insurance this quarter. Banks in all risk categories will see premiums increase by seven cents for every $100 of deposits, because of, and despite, current conditions. It's one more element that makes the business of banking, including deposit gathering, a lot harder. Under the final rule, issued Dec. 16, risk-based rates will range between 12 and 50 basis points, annualized, for the first-quarter 2009 assessment. (Given their risk profiles, most institutions will, in fact, be charged between 12 and 14 basis points.) This is bad news for the industry, says John Boucher, CEO, of the $950 million assets South Shore Savings Bank, South Weymouth, Mass. This is bad news for this bank, operating as it does in the state of Massachusetts where the Depositors Insurance Fund (DIF), applies. In effect, it will cost us about $600,000. His comments echo the frustrations of many bankers over the double whammy of sharply increased premiums (they were not needed at all for years) and a much higher level of insured deposit coverage. The scenario is complicating the already difficult math of deposit and loan pricing. While banks recognize the need for the premiums to rebuild the fund--and largely welcome the higher coverage--the frustration comes over the underlying causes of all this, which most of the industry had little to do with. Current events have certainly made most traditional bankers edgy. There was a coordinated pushback by the ABA and various state associations when the FDIC first announced its proposal. Their point was that rebuilding the fund faster than necessary would drain funds from banks that could otherwise be loaned. That message had some effect because the FDIC originally wanted a steeper rate hike--particularly for institutions with less than stellar risk ratings. In its December release, FDIC settled on a phased-in approach, with additional changes taking place in the second quarter. Strictly speaking, the rate hike was planned as early as last March, when drains on FDIC reserves kicked off rumblings of the need to rebuild the FDIC's fund. But clearly increase was in response to the drain on the fund from recent failed-bank resolutions, plus increased coverage and other commitments. Does anyone believe that the increase to $250,000 will be temporary? Boucher asks rhetorically. In fact, bankers polled at ABA's Annual Convention last fall indicated by an overwhelming majority that a rollback wouldn't be likely. Flight varies by region By now, anyone who cares knows the story cold: Wall Street investment banks and assorted hangers on had a run of excess, flamed out like a troubled airplane falling from the sky, and the economy has been left staggering as a result. In terms of deposits, conditions were set for a classic flight to safety. That is, if you can find the pattern--and read it like a trail of smoke. Charles Runde, president and CEO, First National Bank of Platteville in Wisconsin, wonders why the flight phenomenon hasn't been more pronounced for his $150.8 million-assets institution. It could be that, at the bottom of the cycle, people are afraid to move their money, Runde says. Instead of seeking preservation or comparatively modest creep-back of value, consumers may be leaving funds parked on the Street waiting for a rebound. While he sees the logic to it, First National's CEO is still disappointed: I would have expected more in the way of funds coming in, he says. John Boucher (pronounced Bu-shay) says, in contrast, that his bank's experience of the flight to safety was immediate and dramatic in September and October, when some individuals came in with checks to deposit for $300,000. …

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