Community Banks andCore Deposits

Strategies for Building Core Deposits

WAMU(What A Mistake in Underwriting)

What’s Happened in theLast 6 Months

Let’s take a moment to look at the past and see what’s happened in the banking industry in Maryland.

• Who got TARP money• Who sold• Who were issued enforcement actions

TARP Money• 16 banks (15 holding companies) in Maryland have

received TARP funds totaling ~$426million

Who Got Sold• Provident Bank sold to M&T Bank

– Issues:• Heavy investment portfolio losses – Trust preferred and Agency MBS.• Lack of core funding.• Relied on home equity loans as driver of growth.

• Chevy Chase Bank sold to Capital One(I know Chevy Chase Bank isn’t really a Maryland Based bank. But it really is. It moved its charter from Maryland to Virginia in 1996 so as to take advantage of tax laws related to its credit card business. Let’s remember it maintains its corporate headquarters and more than 50% of its branches in Maryland)

– Issues:• Heavy non-traditional mortgage lending products (the Infamous Cash-Flow

Option Arm Mortgage).• Invested heavily in wholesale mortgage banking.• Got caught holding the bag with a significant amount of loans it could not sell

or securitize when the secondary mortgage markets collapsed.

Who May Need to Sell• First Mariner Bank

– First Mariner is bleeding red, though it is considered to be well capitalized, including an additional $6 million from its parent, First Mariner Bancorp, is one of those banks in the $500 million to $2 billion asset size that I call a“DMZ Bank.”

• Wilmington Trust FSB– Another DMZ bank. I am not sure how this bank qualifies as a Maryland

based bank. It has no branch offices in the state and a suite address at 111 Calvert St. It operates essentially as an internet bank (and we know how successful internet only banks have been). Its holding company, Wilmington Trust Corporation of Delaware, received $330 million in TARP money yet its year end capital ratio is 5.13%.

• K Bank– And yet another DMZ bank. This bank had been doing well year on year

until 2008. It losses this year has been primarily driven by the need for increased loan loss provisions. The question is how much more will it need in 2009. Also, the bank’s core funding is very weak. Approximately 20% of it deposits is core funds.

“DMZ Bank” defined: Banks ranging in assets from $500 million to $2 billion. A zone just like a military DMZ, where anyone or anything entering that zone is at risk of termination. Not an easy place to be.

Enforcement Actions• Four Maryland banks received enforcement actions

since June of 2008• Suburban FSB has since been taken over. It had a

Cease and Desist issued against it in March 2008.• None of our credit union brethren have received

enforcement actions from its primary regulator, National Credit Union Administration (NCUA)

What Does the Future Hold?"We are seeing the next wave of industry consolidation, either in the form of managed consolidation, encouraged by the regulators, or strategic acquisitions of banks with solid core deposits and an established franchise“ As quoted, Kevin James Shay and Steve Monroe. “Chevy Chase Bank, Citi in talks, Sale would boost New York institution's presence in state. The Business Gazette of Politics and Business, 14 Nov 2008.

• The signs are not positive:– One third of all U.S. banks will disappear in the next five years. It’s

getting harder and harder to be a mid-tier bank (those in the $500 million to $2 billion range).

– What does that mean for Maryland Banks? Maryland can expect to lose up to 30 of the 94 banks in the next five years.

– In the last five years, especially during the boom, Maryland chartered only seven new banks. That’s less than one bank a year.

What’s a Bank To Do?

• Concentrate on deposit gathering and not on borrowing. – Wait a minute! Isn’t that what the new

administration wants banks to do…LEND? Not so fast.

– Wholesale funding was and still is the problem.

– Deposits matter. Repeat after me, slowly –DEPOSITS MATTER.

– Focus on the right lending coupled with deposit growth.

Why Deposits?

• Deposits remain the real value of banking.• It’s virtually impossible to run an effective

bank of any size without a culture of deposit gathering and deposit growth.

• Good deposit growth leads to good lending.

• The bank branch is not dead. It is the cornerstone of any bank.

Start Thinking Outside the Box• Stop thinking like a banker and start thinking like

a retailer.– Create a deposit culture.– Create value added branch programs.– Branches – need to become financial advisory based,

not just transaction based.– Develop attractive deposit products.– Marketing, Marketing, Marketing

• For example: Target, Best Buy, Macy’s…– They sell lifestyle (Isn’t saving money a lifestyle?)– They’ve always got a Sunday insert selling products

A New Way to Branching for Deposit Growth

• Joint Venture Branching– A branch is jointly “owned” by the Sponsor Bank and

by local individuals – For Example: Bank of Hometown, A division of Big Bank (in

really fine print)

– Not Complicated– local “ownership” need not take the form of a direct equity

interest in a separate jointly owned entity.– It can be incentive based compensation.– Great way to enter a market with relatively low capital.

– Local “owners” have a vested interest in branch success

Get Back to Portfolio Lending• Residential mortgage opportunity

– Return to basic common sense credit and property underwriting and solid loan documentation.

– Stay local, don’t venture outside your geographic market (if you cant drive there in 2 hours, it’s too far)

– Seek opportunities in niches where the capital markets are gone– Hybrid: 5/1, 7/1 (there’s nothing wrong with these if they are done

correctly and realistically, better than going long 30 years).– Low LTV non-conforming loans (good loans when done right).

• Mortgage bankers and brokers either out of business or are just about out of business. – Just visit mortgage implode (www.mortgage-implode.com)

• Secondary markets gone– Yes, I know. The Feds are trying bring back the secondary

markets. Isn’t that part of what led up to this crisis? All the good products were securitized, so to keep fueling the engine they started looking for stuff to securitize whatever and wherever.

Conclusion

• Now is a good time to be a banker. It’s about leadership.

• Don’t just stand there like a deer caught in headlights.

• Be creative and prepared to seize opportunity.

• The branch is back with a vengeance.• Turn your branch people into advisors

instead of order takers.

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