A onetime federal insurance assessment to pay for a growing number of bank failures will take a chunk out of some banks' second- quarter earnings.

Banks must pay a Federal Deposit Insurance Corp. assessment in September of 5 cents for every $100 of assets minus capital. Under accounting methods that most banks use, the impact will show on earnings reports coming out this month.

Janney Montgomery Scott recently estimated the cost for 27 northeastern banks, including Paramus-based Hudson City Bancorp Inc., Jersey City-based Provident Financial Services Inc., and Investors Bancorp Inc. in Short Hills. The assessment will reduce their second-quarter earnings by as much as 33 percent, according to the report.

And that won't be the end of the FDIC insurance price increases, as the failed bank list will likely get longer, further eroding the fund, Janney analyst Rick Weiss predicts. "I think over time the FDIC will keep increasing this," he said.

To be sure, rising bad loans and the down economy remain the biggest concerns for most banks, but deposit insurance costs are close behind.

"Those are monies that affect earnings and reduce a bank's liquidity, and that does affect the ability to lend," said John McWeeney, president of NJBankers, a trade group.

"[The FDIC] is punishing the banks that are still living," said Ronald Hermance, Hudson City's chief executive officer. The costs get passed on to consumers, he said. "They are hitting the industry at the worst time," said Domenick Cama, Investors Bancorp's chief operating officer.

The FDIC has reported 53 bank failures so far this year, up from 26 in all of 2008 and three in 2007. The insurance fund has dwindled in the past two years to $13 billion as of the end of March from more than $50 billion. The FDIC aims to boost the fund back to more than $50 billion in no more than seven years, said David Barr, spokesman for the FDIC. The government agency has a backup if bank failures get out of hand: a temporary $500 billion line of credit from the U.S. Treasury.

From 1996 through 2006, a federal law allowed well-capitalized banks to pay no insurance premiums, so no cushion was built when times were good, Barr said. In recent years, the FDIC returned to a system where all institutions pay regular premiums, which have been increased this year to as much as 16 cents per $100 in deposits for well-managed banks.

The FDIC tried this year to lift rates to 20 cents for every $100 in deposits but eased back from that plan, after bankers complained.

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(SIDEBAR)

Assessment hit

Expected impact of Federal Deposit Insurance Corp. assessment on second-quarter per-share earnings

Bank Previous estimate FDIC assessment* Revised estimate

Hudson City Bancorp 27 cents 3 cents 24 cents

Investors Bancorp 6 cents 2 cents 4 cents

Provident Financial 14 cents 4 cents 10 cents

*after tax

Source: Janney Montgomery Scott

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E-mail: newman@northjersey.com

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