Small banks pay for big mistakes

CHARLOTTESVILLE — By sticking to its conservative style through the housing market boom, Virginia National Bank stayed clear of the “toxic asset” troubles that crippled industry powers.

But now the problems of those giant institutions are causing indirect pain for community banks that avoided subprime lending and complicated derivatives at the root of the financial system mess.

Bank failures have caused the Federal Deposit Insurance Corp. to dip into its emergency insurance fund to guarantee insured deposits. And now the FDIC — worried about the trend — plans to charge a special assessment and higher premiums to banks to fill the pot back up.

The FDIC considers turning to taxpayers to pump up the reserve only as a last resort, according to a spokesman.

At Virginia National Bank, based in Charlottesville, the new FDIC assessment could end up costing $350,000, an unbudgeted expense that adds to an already challenging year.

That new amount would push the bank’s total FDIC bill for this year to $829,000.

For bank customers at any institution, the unplanned FDIC assessment could result in higher fees.

“Some banks will absorb it, keep their costs low. Other banks will pass on the assessment to customers by increasing fees,” said Glenn Rust, CEO of Virginia National Bank.

Rust said he understands and supports the need to keep the FDIC fund healthy. It has always been funded by banks.

Virginia National Bank absorbed all of a special FDIC assessment a year ago, but Rust said the bank hasn’t decided how to handle this latest potential charge.

In North Garden, Old Dominion National Bank faces the same dilemma.

“You either pass it on through fees - commercial fees, individual fees - or you absorb it,” said bank President and CEO Charles Darnell. “This dramatically impacts your bottom line.”

The FDIC originally proposed the assessment at 20 cents per $100 of deposits, based on deposit levels on June 1. The payment would be due in September.

The agency is currently accepting comments on the assessment proposal.

At the 20-cent level, the FDIC charge could cost Albemarle County-based StellarOne Corp. more than $4 million.

“We carry the burden of other financial institutions’ mismanagement practices,” said StellarOne spokeswoman Linda Caldwell. “The increased cost is a particular challenge and an undeserved one for well-run, well-capitalized banks.”

StellarOne, Virginia National Bank and Old Dominion National Bank all avoided subprime mortgage lending in recent years.

Darnell said the unexpected FDIC assessment is frustrating, on top of higher quarterly premiums already in place that go toward the agency’s fund.

The FDIC charge would come at a time when many banks already are struggling to shore up balance sheets as the federal government pumps billions into some of the biggest financial firms to keep them from failing.

FDIC has set aside $22 billion to cover any projected losses over the next year, leaving $19 billion in an insurance fund, according to the Associated Press. The deposit insurance fund now stands at its lowest level in nearly a quarter-century.

Just two and a half months into the year, 17 federally insured banks have failed, the AP report said. The FDIC believes U.S. bank failures will cost the deposit insurance fund more than $65 billion over the next five years. The FDIC insures bank accounts for up to $250,000, but not products such as bonds, stocks or insurance deposits sold by insured banks.

In December, StellarOne received $30 million from the government’s bailout funds, though the bank is considered well-capitalized and in solid shape. Caldwell said then that the bank would use the money for lending to individuals and businesses, as well as for a refinancing program.

She said last week that the bank does not plan to use that money to pay the new FDIC assessment.

Old Dominion has applied for federal money, but whether it gets approved or will take money if approved is unknown, Darnell said.

Virginia National Bank decided not to pursue federal money.

All three community banks and other institutions said they have money to lend, despite some conventional wisdom that assumes otherwise.

“Quite honestly there needs to be more positive information to spread and less negative,” Darnell said.

William Beale, president and CEO of Bowling Green-based Union Bankshares Corp., said the assessment would be a “severe hit.” But he also said the company believes the fund is better off if supported by banks.

FDIC spokesman David Barr said the FDIC has several sources of money to draw from to insure deposits. It’s also requesting an increase in its ability to borrow from the Treasury Department from $30 billion to $100 billion. That line of credit hasn’t been increased over the years as bank deposits have gone up.

The FDIC hasn’t previously used the Treasury credit, he said.

“The FDIC has and always will live up to its obligation to protect the savings of Americans,” Barr said.

Beale said Union Bankshares, which operates more than 40 branches of Union Bank & Trust in Virginia, did not make subprime loans during the housing boom. The company did take $59 million through the government’s financial system bailout program. It’s using the money to increase lending and to support continued growth.

Beale said Union Bankshares has seen the rate of growth of customer deposits increase dramatically and the pace of loans slow as people seek to put away money and are hesitant to spend or borrow.

“We would welcome the opportunity to lend a lot of money to qualified borrowers right now,” he said. “It’s how we make money.”

McGregor McCance is managing editor for the Daily Progress in Charlottesville.