Soaring Federal Deposit Insurance Corp. premiums have delivered a body slam to Spokane-area banks, which already were grappling with the costs of dealing with problem loans.

The FDIC hiked its deposit-insurance premium rates in 2008 and again this year as bank failures, unheard of a few years ago, surged. In addition, it slapped banks on June 30 with a hefty special assessment in another effort to replenish its Deposit Insurance Fund.

"That cost us $180,000," Randy Fewel, president and CEO of Inland Northwest Bank, of Spokane, says of the special assessment. "They're saying there may be another one before the end of the year."

Through the first six months of this year, Inland Northwest Bank's deposit-insurance costs soared to $451,000—more than three times as high as the $115,000 it paid in the year-earlier period, Fewel says. For all of 2007, the bank spent just $52,000 in premiums.

Because larger banks have far more deposits, their deposit-insurance costs have soared to much loftier heights.

Washington Trust Bank's deposit-insurance costs shot up nearly fivefold to roughly $4.5 million through the first six months of 2009, including a $1.9 million special assessment it incurred June 30, says Jack Heath, president and chief operating officer of the Spokane institution. "It's a really significant cost to banks," Heath says. The bank's deposit-insurance costs were about $950,000 in the first half of 2008—but just $321,000 for all of 2007.

While the Deposit Insurance Fund must be rebuilt, Heath says the Washington Bankers Association, of which he is the outgoing chairman, will oppose a second special assessment this year because even though bankers are willing to come up with the money to replenish the fund, they don't want to pay a hefty share of it in a short period of time.

On May 22, when the FDIC announced the June 30 special assessment, Chairwoman Sheila Bair said, "It is probable that an additional special assessment will be necessary in the fourth quarter, although the amount of such an assessment is uncertain."

The FDIC increased its minimum premium rate from 1 cent per $100 of deposits in 2007 to 5 cents in 2008 and 12 cents in 2009. It said Dec. 16 that its rates, which are risk-based, would range between 12 cents and 50 cents this year.

The rate a bank pays is calculated with a complex formula that involves the use of multipliers and ratios and classification of the bank in one of three categories based on how well it's capitalized, Fewel says. A bank's so-called CAMELS regulatory rating—of its capital, asset quality, management, earnings, liquidity, and sensitivity to interest rate risk—comes into play. The law forbids banks from disclosing those ratings, which federal and state bank examiners determine, Fewel says.

The special assessment levied June 30 was 5 cents per $100 of total assets less "Tier 1" regulatory capital, the FDIC says. Tier 1 capital is equity capital plus retained earnings. The assessment is payable Sept. 30, and banks must deduct it from their second-quarter earnings.

"Every bank that issues a press release on their second-quarter earnings will mention it," Fewel says. "I know I will."

Sterling Financial Corp., of Spokane, did last Thursday, when it released its second-quarter earnings, saying the FDIC had hit it with a $5.6 million special assessment. Sterling doesn't release the amounts of FDIC premiums it pays.

Sue Horton, chairwoman, president, and CEO of Wheatland Bank, of Spokane, says that because of the increased premiums and the special assessment, Wheatland incurred $218,000 in FDIC deposit-insurance costs through the first six months of this year. The bank had budgeted just over $230,000 for deposit-insurance expenses for all of 2009, but now has increased its budget for those costs to $350,000, Horton says.

"For a bank that had zero net loans lost in 2008 and a delinquency rate of 1 percent on June 30, there's something about that that doesn't feel right," Horton says. She says many banks have large loan losses and far higher loan-delinquency rates than Wheatland, which didn't apply for capital under the U.S. Treasury's Troubled Asset Relief Program, or TARP.

The FDIC is required to keep its Deposit Insurance Fund at 1.15 percent to 1.5 percent of insured deposits, but last year the fund's balance fell as low as 0.4 percent, and in the first quarter this year, it plummeted to as low as 0.27 percent, says Chris Cole, vice president and senior regulatory counsel of the Washington, D.C.-based Independent Community Bankers Association. The FDIC insures deposits at the nation's 8,384 banks and savings associations, and the insured institutions' premiums fund its operations.

Because of the fund's shortfall, it looked for a time as if the June 30 special assessment might have been four times as high, or $720,000 as opposed to $180,000 in Inland Northwest Bank's case, Fewel says.

"Can you imagine that?" he asks.

The FDIC approved the June special assessment after Congress enacted legislation to increase the agency's limit on borrowing from the U.S. Treasury to $100 billion from $30 billion, with emergency borrowing of up to $500 billion authorized under certain conditions, the Independent Community Bankers Association says. The association praised the FDIC's decision to base the assessment on total assets less Tier 1 capital rather than on deposits, which made the nation's big banks carry more of the burden.

At Mountain West Bank, of Coeur d'Alene, deposit-insurance costs through June 30 totaled nearly $1.08 million, up from just $213,000 last year. The special assessment, which is included in the $1.08 million, came to roughly $559,000.

"Certainly, it was a significant item for our bank on the P&L statement for the quarter," says CEO Jon Hippler.

Given today's adverse economic climate and the problems that have afflicted some banks, the increased premiums and the special assessment came at a bad time for institutions, Hippler says.

"It's not a time when you want to see increased expenses," he says. "This is a time when you should be preserving every bit of capital you can."

Fewel says the increased deposit-insurance costs are far from the only strain on bank profit-and-loss statements. "I'm pumping enough into my loan-loss reserve" to feel increased costs just from that, he says. Meanwhile, he adds, construction lending is "practically nonexistent," strong commercial real estate customers don't want to borrow money because they're wary of launching new ventures now, and regulators are scrutinizing loans to weak commercial real estate customers carefully.

"We're not putting many assets on the books that are higher yielding right now," Fewel says.

From 1996 to 2006, banks weren't assessed deposit-insurance premiums at all because the fund was flush and there were no bank failures, Fewel says.

"I'd much rather have been paying $10,000 a month in good times," he says. Hippler also believes it would have been preferable for the industry to have paid higher premiums during the unusually strong banking period that prevailed while the U.S. economy was booming.

"It's unfortunate that we as an industry didn't get together with the FDIC and pay a little more when times were good," he says.

Both Hippler and Fewel expect that higher deposit-insurance rates will prevail for some time.

"Congress has given the FDIC eight years to get the fund back up" to the required level, Fewel says. "I don't see premiums coming down for quite some time."

Says Hippler, "The trend is upward. The insurance fund has certainly got some challenges."

Heath says it's important to remember that banks profited when there were no assessments, and adds, "The insurance, to people, is very important. It's a part of the fabric of the banking environment. We've got to keep that fund strong."

Heath is philosophical about the higher premiums and the special assessment, saying, "It's a cost of doing business. Banks have to absorb the cost and work through the cycle. It puts some pressure on your earnings."

There's no particular way to overcome the added expense, other than to manage an institution as well as possible, Heath says, adding, "It's another challenge in a challenging environment."

He says, though, "We're seeing some signs of the economy improving." Heath says Washington Trust's residential loan center recorded mortgage originations of $175 million through the first six months of 2009, thanks to refinancings driven by low interest rates and strong demand from borrowers for mortgage loans to buy houses in the $125,000 to $375,000 range. First-time buyers, helped by an $8,000 federal tax credit, low mortgage rates, and softer housing prices, have been particularly active in the market, he says.

On the commercial banking side, Heath says, "We're starting to see a few customers break loose with some capital projects." He says business owners have been helped by the improved stability in the stock market in recent months.

The first-time home-buyer credit has helped Mountain West Bank rack up record residential loan production of $321 million through the first six months this year, while making more than half of its home mortgage loans to buyers who were purchasing houses, rather than refinancing, Hippler says. Still, the upper reaches of the housing market in Kootenai County "are very sluggish," he says.