Magazine article American Banker

How Premium Refunds Are Deployed Speaks Volumes

Magazine article American Banker

How Premium Refunds Are Deployed Speaks Volumes

Article excerpt

As third-quarter earnings unfold, the manner in which banks use their federal deposit insurance refunds has been a key indicator of relative strength.

"It's a revenue growth issue," said Sanford C. Bernstein analyst Moshe Orenbuch. "A bank's propensity to let the refund flow through to the bottom line is inversely related to its ability to generate revenues."

The Federal Deposit Insurance Corp. had voted in August to cut the assessment for "well-capitalized" banks from 23 cents to 4 cents per $100 of insurance deposits.

The action was required since the agency's bank insurance fund had reached its statutory reserve goals.

With FDIC rebates received for the month of June and the entire third quarter, banks were granted an additional measure of flexibility in how they chose to report earnings.

"If you have a bank that is going to meet or exceed Wall Street expectations without taking their FDIC benefits, they will do just that. They'll bury the benefit, maybe through offsetting expense charges, and save it for a rainy day," said Thomas F. Theurkauf Jr., with Keefe, Bruyette & Woods Inc.

"At the other end of the spectrum, banks that are particularly hitting the revenue wall or having difficulty growing earnings will take the full benefit," Mr. Theurkauf added.

Banks in the latter category included Compass Bankshares, Birmingham, Ala.; New Jersey's First Fidelity Bancorp., and Shawmut National Corp., Boston. All of these companies are struggling with sluggish revenues and used the refund to reduce expenses and thereby boost earnings. …

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