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updateFinancial ManagersA publication of the Financial Managers SocietySeptember 16, 20082Community institutions3Fair value confusion7Competitive strategyLiquidity risk managementHeightened scrutiny by examiners continuesLiquidity risk management isgetting heightened scrutiny fromexaminers, due to concerns over theimpact of market volatility and afragile economy. The FDIC recentlyissued guidance warning financialinstitutions that they must effectivelymeasure liquidity risks and havecontingency funding plans in placefor the current volatile environment.Examiners are evaluating theability of institutions to maintainaccess to funds and to liquidateassets in a “reasonable and costefficientmanner.”The FDIC cautioned that manyinstitutions have underestimated thedifficulty of obtaining or retainingfunding sources. Other regulators,including the OCC, OTS, andNCUA, are also closely monitoringliquidity concerns.Brokered depositsIn its guidance, the FDICinstructed institutions to beparticularly wary of risks relatedto brokered deposits and high-ratedeposits. The guidance restrictsthe use of brokered deposits forFannie, Freddie rescueU.S. government seizes control to bolster GSEssome insured institutions, no doubtreacting to the high concentrationof brokered funds in recentbank failures.Mike Guglielmo, managingdirector, Darling Consulting Group,Newburyport, Mass., said thatthe portion of the FDIC’s policythat addresses brokered deposits,much of which has already beenin effect, is probably intended as astrong reminder to institutions thatare bordering on “less than wellcapitalized” levels.continued on page 5In a dramatic rescue move, the U.S.government at press time seizedcontrol of Fannie Mae and FreddieMac, the nation’s two giant mortgagefundingcompanies, in an effortto stabilize the deteriorating U.S.housing market.The two companies, whichtogether hold $5.4 trillion ofguaranteed mortgage-backedsecurities and debt outstanding,provide mortgage funding foraround three-quarters of new homemortgages in the nation.Treasury secretary HenryPaulson, Jr., who engineered theplan, announced that the twocompanies were being placed undera government conservatorship,giving control of managementto the Federal Housing FinanceAgency (FHFA), the regulator ofthe two GSEs.Such conservatorship is a statutoryprocess designed to stabilize thetroubled entities with the objective ofreturning them to normal businessoperations, officials explained.The rescue package representsa massive federal intervention andcould become one of the most costlyfinancial bailouts in U.S. history.A previous estimate by theCongressional Budget Officesuggested that a federal rescuecould cost taxpayers as much as$25 billion, while other observerssuggested that in a worse-casescenario, it could total $100 billion.“In the end, the ultimate costto the taxpayer will depend on thebusiness results of the GSEs goingforward,” Paulson said. He notedthat prior to launching the plan,the Treasury consulted with Fedchairman Bernanke, in addition toother key government players.continued on page 4

One man’s ruminationsCommunity institutions: the next generationSteve Williams, of CornerstoneAdvisors in Scottsdale, Arizona, isone of my favorite commentators onfinancial institutions…especiallycommunity institutions.He and others at Cornerstonepublish a weekly e-mail newslettercalled “Gonzo Banker,” a “collectionof observations, ruminations,predictions and random thoughts.”If you’ve never seen it, I recommendyou go to their website and subscribe.It’s free, and the articles are alwaysinformative, slightly irreverent,usually provocative, and frequentlyhumorous.I found Steve’s August 29 article,“Community Banks: The NextGeneration,” especially interesting andwondered how our members mightreact. So, I’m hoping many of youwill take a look at it and share yourreactions with me. The article is in theIndustry News Archive of our web siteunder September 2 (www.fmsinc.org).I’m at dyingst@fmsinc.org.Steve’s article is a follow-up to onehe published in June entitled “Survivingthe Dark Ages of Banking”…also in ourArchive, under July 2. In that piece,he lamented the current state of theindustry, and castigated us a bit forbeing asleep at the wheel. He does,however, offer some “rules to live by”to get through the trough, which arecertainly worth a look.Stale assumptionsIn this latest article, he claims thattraditional community banks, andto a certain extent credit unions, arefaced with an emerging identity crisis.He argues that our age-old strategicplaybook has gone stale…very stale.Steve views the traditionalcommunity bank business modeland strategic identity, built on datedassumptions, as crumbling and causing“tons of grief.” Those assumptions:•“We are at the center of ourtown’s business community”•“Our conservative local lendingknowledge allows us to maintainsuperior credit quality”•“We differentiate through ourpersonal service that the big guyscan’t match”•“We don’t compete on price sowe generate strong loan yields and lowfunding costs from our core deposits”•“We attract experienced talentwho don’t like the headaches at largebanks”•“We’re not efficient like the bigguys, but we watch expenses closely”•“We will build this baby upand then flip it for a nice ‘three timesbook’ liquidity event”Steve debunks each of theseassumptions, and addresses why hebelieves each has to be discarded.His perspectives deserve your reviewand thought.New imperativesUnlike many pundits, however,who predict community institutionswill go extinct, he does not. Hebelieves that community bankingwill adapt, but not with same stalestrategic playbook.He posits that the next generationof community banks must be drivenby a new model, and offers severalimperatives that he views as majorcomponents of that model:•Deep industry knowledgeand niches—getting excitedabout supporting real businessesand finding niches and perhapsspecializing in certain industries•Loans and business services—the next generation players will haveto have a more balanced focus onloans, deposits and fee based services•Technology and process ‘inthe cloud”—becoming more adept atvirtual banking...tapping into Webbasedsystems and processes providedby third parties that can match thecapabilities of the big players•Industry collaboration to driveefficiency—collaborating more on howto deliver services and share resourceswith other community institutions…staying independent, but sharingcommon I.T. operations, delivery andrisk management resources•Training on steroids—with alikely shortage of experienced talent,significant credit, wealth management,payments, operations, and technologytraining will be a must•Strategic liquidity events—whenbuilding up and selling the nextwave of community banks, the bigmultiples are likely to go to the morecreative niche playersWilliams obviously believesgoing forward that the game will bemarkedly different, and only thosethat draft a new strategic identity andvision will prosper.Please, take a look at his twopieces and let me know yourreactions…are his ruminations oldnews? Are his criticisms unfair?Are his “imperatives” unrealistic?Unnecessary? Sophomoric? Let meknow and we’ll summarize yourreactions in a future article. FMUDick YingstPresident/CEOFinancial ManagersupdateFinancial Managers Update ispublished biweekly by Financial ManagersSociety, Inc. • 100 West Monroe, Suite 810,Chicago, IL 60603 • 312-578-1300 • info@fmsinc.orgEditor: Tom Lanningtoml@fmsinc.org, 312-630-3421The opinions and statements set forthherein are those of the individual sourcesand do not necessarily reflect theviewpoint of the Financial ManagersSociety or its individual members, andneither the Society nor its editors and staffassume responsibility for suchexpressions of opinion or statements.Copyright © 2008, Financial ManagersSociety, Inc. All rights reserved.2 • Financial Managers Update • September 16, 2008

Fair value confusionAuditor cites current FAS 157 implementation challengesThe application of fair value accountingprinciples under FAS 157 is currentlycausing some perplexing challenges andconfusion for community institutions,an auditing specialist warns.One development complicating thesituation is that while recent accountingregulations have emphasizedthe importance of consistency inreporting, some audit firms seem to beinterpreting the rules more aggressivelythan others.Dan Trigg, national financialinstitutions practice leader atMcGladrey & Pullen, LLP, Schaumburg,Ill., says that two key issues, affectingdifferent institutions in varyingdegrees, involve the interpretationand application of impairment oninvestment securities, and also theapplication of FAS 157 to collateralizeddebt obligations (CDOs).Impairment issuesThe larger issue, affecting a widernumber of institutions, involves theapplication of fair value accountingto other-than-temporary impairment(OTTI) on investment securities. Asignificant amount of confusion hasarisen over how such impairmentshould be calculated, Trigg said.“OTTI is the big deal right now,”Trigg said. “It seems that several ofthe accounting firms are taking ahard stand (regarding OTTI) on theperpetual preferred (stock) issued bythe GSEs—Fannie and Freddie.”The values of the GSE preferredstock have been down for some time,he said. “The question on perpetualpreferred stock is: to determine OTTI,when will that stock value come back towhat the original cost was?”Significantly, many institutionsare wrestling with the issue, whichis addressed in FASB Staff PositionNo. 115-1, he said. “Here’s my point:OTTI is a fact-and-circumstancedrivenjudgment area—thereare no bright lines out there fordetermining yes or no.”Thus, an institution must makea judgment, and auditors ought tounderstand what that process is, he said.“Objective documentationis absolutely critical,” he added.“Institutions need to have a process inplace and document their position as towhy OTTI should be recognized or not.”However, frequently institutionsaren’t looking to take losses as OTTIcharges, because they firmly believethe market will come back, he said.“What they’re not thinking about isthe duration period, and whethersome of their actual principal valuehas been impaired.”The larger issue,affecting a widernumber of institutions,involves theapplication of fairvalue accounting toother-than-temporaryimpairment oninvestment securities.Dan Trigg, National FinancialInstitutions Practice LeaderMcGladrey & Pullen, LLPSchaumburg, Ill.But audit firms may see thingsdifferently.“I know of at least one Big Fourfirm that basically drew a bright linein the sand and said, if your value hasdropped 35% and has been outstandingin a loss position more than six months,you have OTTI,” he said. “Well, thatdoesn’t seem to fit the spirit of GAAPaccounting, in my mind.”A second major accountingchallenge involves figuring the fairvalue of CDOs whose underlying assetsare trust-preferred securities issued bymid-tier banks that are still performing,Trigg said. “That is very inconsistentacross the accounting firms, veryinconsistent across the banking arena.”Significantly, a number ofcommunity institutions with weakloan demand have gotten involvedwith CDOs in pursuit of increasedyields, and more communityinstitutions are involved with CDOsthan generally believed, Trigg said.“That surprised me.”He said he knows of at least fivecommunity institutions with assets of$600 million to $1.1 billion that havesuch CDOs in their portfolios.“They made an investmentdecision that these CDOs had anincreased yield that could improve theinvestment portfolio,” he explained.“And when they looked at theunderlying assets and saw that theywere trust-preferred securities by wellrun,mid-market banks, they decidedto take that risk.”Cash flowsIn these particular instances, boththe CDO cash flows and interest ratesare performing well, he said. “Thecash flows of those CDOs indicatethat there are no impairment issues.”But here’s the problem. Themarket value, if you apply FAS 157,gives a different answer than if youapply EITF 99-20. Thus, bankers arebasically saying: “auditors are makingme take write-downs, but I think Ihave a basis to say that I don’t have awrite-down,” Trigg said.Unfortunately, although theCDOs in question appear to be inreasonably decent shape and areperforming well, the institutionsholding them must face the reality of thecurrent marketplace—they are gettingsignificantly less on the dollar than onemight think, and less than desired.Trigg explained that FAS 157basically says you must use a principalmarket convention, and this hasunfortunate consequences for thecurrent market.“Everybody has a self-fulfillingprophecy that says—hey, if theprincipal market and market valuesays you have 60 cents on the dollar,then that’s what you write down to,”he said. FMUFinancial Managers Update • September 16, 2008 • 3

Fannie, Freddie rescue from page 1As part of the wide-ranging rescueplan:•The two GSEs have been placedinto conservatorship.•New CEOs, supported by nonexecutivechairmen, have taken overmanagement of the entities.•Treasury and the FHFA haveestablished contractual preferred stockpurchase agreements between theTreasury and the conserved GSEs.•Treasury is establishing a newsecured lending credit facility that willbe available to Fannie, Freddie and theFederal Home Loan Banks, serving asan “ultimate liquidity backstop.”•Treasury is initiating atemporary program to purchase GSEmortgage-backed securities to furthersupport the current availability ofmortgage financing.Systemic riskPaulson said that the programbeing undertaken is the best meansof protecting financial markets andtaxpayers from systemic risk posed bythe current financial condition of theGSEs. He emphasized that the bailoutis absolutely necessary.“Fannie Mae and Freddie Mac areso large and so interwoven in ourfinancial system that a failure of eitherof them would cause great turmoil inour financial markets here at homeand around the globe,” he said.He explained that the continuinghousing crisis also poses the biggestcurrent risk to the U.S. economy. “Oureconomy and our markets will notrecover until the bulk of this housingcorrection is behind us,” he said.Now that the bailout is underway,the primary mission of Fannie andFreddie will be to proactively work toincrease the availability of mortgagefinance, which includes examiningthe guaranty fee structure with aneye toward mortgage affordability,he said. “Because the GSEs arein conservatorship, they will nolonger be managed with a strategyto maximize common shareholderreturns, a strategy which historicallyencouraged risk-taking.”Significantly, however, Paulson notedthat the conservatorship status doesnot eliminate the outstanding preferredstock held by financial institutions—it places preferred shareholders insecond position, after the common stockshareholders, in absorbing losses.In responding to the bailout, the Fed,FDIC, OCC and OTS said jointly thatthey have been assessing the commonand preferred stock exposures ofbanks and thrifts to Fannie and Freddie.“The agencies believe that, while manyinstitutions hold common or preferredshares of these two GSEs, only a limitednumber of smaller institutions haveholdings that are significant comparedto their capital,” they said.“Our economyand our markets willnot recover untilthe bulk of thishousing correctionis behind us.”Henry Paulson, Jr., Treasury SecretaryTreasury DepartmentWashington, D.C.Depository institutions areencouraged to contact their primaryfederal regulator, if they believe losseson holdings of Fannie or Freddiecommon or preferred shares—whetherrealized or unrealized—are likely toreduce their regulatory capital below the“well-capitalized” level, Paulson said.The banking regulatory agenciessaid they are prepared to work withthese institutions to develop capitalrestorationplans pursuant to regulationsconcerning capital and promptcorrective action. “All institutions arereminded that investments in preferredstock and common stock with readilydeterminable fair value should bereported as available-for-sale equitysecurity holdings, and that any netunrealized losses on these securities arededucted from regulatory capital,” theregulators said.Significantly, the impact of theGSEs’ bailout could affect communityinstitutions around the U.S. in bothdirect and indirect ways. Just days beforethe Treasury launched its rescue steps,a prominent industry strategist offeredperspective on various possible impacts.“Fannie and Freddie are absolutelymission-critical to mortgage homeownership in America,” said RoyHingston, portfolio strategist, ShayFinancial, Miami, Fla. “They cannot beallowed to fail—that is not a question.”Hingston said (prior to thebailout) that many Americans and alot of international people have beenconcerned about the strength of the U.S.banking industry in general, includingsome of the largest and most wellknown institutions—not just Fannieand Freddie. He cited Citibank, BearStearns, and Merrill Lynch as examples.Common stockHe also pointed out that communityinstitutions which invested heavily incommon stock of the GSEs must facethe dilemma that the stock has fallen toabout $3 or $4 from about $50 to $60.“It’s been devastating,” he said. “It’snot enough of an investment that itwould bring down the institution ifFannie or Freddie stock failed—nobodyis over-invested in Fannie or Freddie.”But there have been some people whohad big common stock investments inFannie and Freddie that have watchedthem erode, he said.However, the challenges involvingcommunity institutions with GSEpreferred stock are different. Hingstonestimated that more than half hisclients have exposure to either Fannieor Freddie preferred. “And those(stocks) have fallen precipitously(before the bailout), because while theyare preferred stock, they are not thatmuch above common in the liquidationsituation,” he said.He pointed out, for example, thatsince Fannie’s preferred stock came out at$25 per share, it dropped as low as $10,before recovering slightly. “The problem,”he said, “is that’s like a 50% decline—which leads to the question that theaccountants want to ask: is it impaired?”And the price for the preferred stock(prior to the bailout), trading at about 50cents on the dollar, was saying that themarket was ambivalent as to whether thestock may or may not be safe, he said.“They know it will either go to zero, orcontinued on page 74 • Financial Managers Update • September 16, 2008

Liquidity risk management from page 1“It’s not the brokered depositsthat put the banks under—it’s whatthey’re supporting with the brokereddeposits,” Guglielmo explained.He noted that in some respects theFDIC’s regulatory enforcement hasrecently toughened, however. Over thepast year, the FDIC appears to havetightened its stance based upon thesignificant amount of denied requestsfor waivers.Guglielmo said that in previousyears, if an institution dropped belowthe “well-capitalized” threshold andrequested a waiver, this would oftenbe granted provided the institutionhad a well defined plan and process inplace. However, on a percentage basis,the number of approved waivers thisyear is significantly less than in yearspast, indicating either a tougheningstance on enforcement, or perhaps thefailure of institutions to articulate aneffective funding plan.Liquidity pool“Look, the game’s different—theability to access funds easily throughvarious alternatives has changed,” hesaid. “The whole liquidity pool hasshrunk, due to tightening standardsand supply-demand factors.”The overall liquidity situationhas become more serious over thepast year, due to the credit crunchweighing down on institutions, headded. “Credit is clearly the numberonefocus of examiners—but a closesecond cousin is liquidity.”He explained that large industryplayers are now hoarding liquidity,thus putting pressure on pricesand also on the smaller institutionsin terms of the liquidity avenuesavailable to them.“You’ve got a number of the bigplayers who are also concerned aboutthe stability of their funding sourcesand the safety of their principal—rightnow, cash is king,” Guglielmo said.Many institutions also are beingchallenged by Federal Home LoanBanks, as some have been tighteningstandards, increasing haircuts, andwidening spreads. While much of thetrend involving tightened liquidityis due to the big players’ issues, itgenerally is affecting everyone, he said.“They (FHLBs) want to ensurethey are managing in a safe and soundfashion as well, and are therefore beingcautious to make sure they are lendingto stronger banks and that banks canafford the borrowings,” he said.Also, due to the current housingcrisis in the U.S., market valuesof some underlying securities thatbanks were using as collateral withthe FHLBs have declined, causing insome cases margin calls and reducedborrowing limits, he explained.“The key issue isto make sure youunderstand yourliquidity needs,your liquidity sources,and how they canbe affected byvarious factors.”Mike Guglielmo, Managing DirectorDarling Consulting GroupNewburyport, Mass.To be sure, regulators havepointed out that the challenge ofmanaging liquidity risks has becomeincreasingly complex for communityinstitutions in recent years, due tosignificant changes in the capitalmarkets, consumer behaviors, andinternational market factors.Most banks, thrifts and creditunions regularly use wholesalefunding sources and off-balance sheetsources of liquidity, and nearly allhave had to adjust to a decline in coredeposit growth.Significantly, in its guidance, theFDIC also placed some restrictionson high-rate deposits. Institutionsthat are “less than well capitalized”are precluded from offering depositinterest rates that are significantlyhigher than the prevailing rates in aninstitution’s normal market area or thenational rate.Institutions that use volatile, creditsensitive, or concentrated fundingsources are generally expected to holdcapital above regulatory minimumlevels to compensate for the elevatedlevels of liquidity risk present in theiroperations, the FDIC said.Individuals responsible for managingan institution’s liquidity should befamiliar with all aspects of suchrestrictions and limitations set forth inFDIC regulations, the agency said.Further, the guidance said thatinstitutions must have contingencyfunding plans that outline practicaland realistic funding alternativeswhich can be implemented as accessto funding is reduced. The plans mustinclude provisions for diversification offunding and capital-raising initiatives,and incorporate events that couldrapidly affect an institution’s liquidity.It pointed out that funding decisionscan be influenced by unplanned events,such as: the inability to fund assetgrowth; difficulty renewing or replacingfunding as it matures; the exerciseof options by customers to withdrawdeposits or to draw down lines of credit;legal or operational risks; the demise ofa business line; and market disruptions.“The key issue is to make sureyou understand your liquidity needs,your liquidity sources, and how theycan be affected by various factors,”Guglielmo said.Ensuring effectivenessHe said it’s prudent for institutionsto evaluate the effectiveness of theirliquidity risk management process.The ALCO should ensure that it hasadequately determined:•The amount of operational,reserve, and contingency liquidity thatis available•The accessibility of that liquidityand its relative cost•The change in the need forliquidity and cash availability, inthe event that economic or marketconditions change•The type of crisis or events thatcould affect operational needs•Actions that would be takenduring a liquidity crisis, and whetherthere is a sufficient early-warning system•The adequacy of currentcontrols and processes to ensurecontinued on page 7Financial Managers Update • September 16, 2008 • 5

✓ Regulatory and Accounting ChecklistThese proposals may be accessed through the FMS Web site at www.fmsinc.org. Go to the Members Only section and followthe Regulations/Proposals link for direct access to the following documents.Reducing Complexity in ReportingFinancial InstrumentsComments due: Sept. 19, 2008Prompt Corrective ActionComments due: Sept. 29, 2008IASB: The International Accounting Standards Board recently issued a discussionpaper on reducing complexity in reporting financial instruments. The paper isdesigned to gather information to assist accounting policy-makers in deciding howto proceed in developing new standards that are principle-based and less complexthan today’s requirements.NCUA: The NCUA has proposed a rule implementing a statutory amendment tothe definition of “net worth” concerning how it applies solely to NCUA’s system ofregulatory capital standards, known as “prompt corrective action.”Basel II, Standardized ApproachComments due: Oct. 27, 2008FDIC/Fed/OCC/OTS: The banking agencies issued an interagency proposal for astandardized framework under Basel II that would be an option for the majorityof institutions. The proposal takes a risk-based approach and includes more riskbuckets, but it also requires a capital charge for operational risk.Earnings per ShareComments due: Dec. 5, 2008FASB: The FASB issued a revised exposure draft proposal, Earnings per Share,which would amend FAS 128. The proposed statement seeks to improve financialreporting by clarifying and simplifying the method of calculating earnings pershare, while promoting international convergence of accounting standards.Truth in LendingFinal rule. No comments necessaryFed: The Fed issued a final rule amending Regulation Z, which implements the Truthin Lending Act and Home Ownership and Equity Protection Act. The changes aredesigned to protect consumers from unfair or deceptive lending, and to provide themwith transaction-specific disclosures, among other things.Home Mortgage DisclosureComments closed: Aug. 29, 2008Fed: The Fed proposes to amend Regulation C, Home Mortgage Disclosure,in order to revise the rules for reporting price information on higher-priced loans.The definition for higher-priced loans would conform to the Truth in Lending rule.Member Business LoansComments closed: Aug. 25, 2008NCUA: The NCUA has issued an advance proposal of proposed rulemakingconcerning member business loans. It is considering revising provisions relatedto loan-to-value ratio requirements, collateral and security requirements,and other issues.Risk-based Pricing NoticesComments closed: Aug. 18, 2008Fed/FTC: The Federal Reserve and FTC proposed rules that would implementthe risk-based pricing provisions in section 311 of the Fair and Accurate CreditTransactions Act of 2003. Under the proposal, a creditor would be required toprovide a risk-based pricing notice to a consumer who has been given materiallyless favorable credit terms, based on a credit report.Underserved AreasComments closed: Aug. 18, 2008NCUA: The NCUA issued a proposal to change the existing process of approvingmultiple group credit unions’ service to underserved areas under the Chartering andField of Membership Manual for federal credit unionsDisclosure of Loss ContingenciesComments closed: Aug. 8, 2008FASB: The FASB issued an exposure draft proposal concerning disclosure of certainloss contingencies, which amends FAS 5, Accounting for Contingencies, and FAS141-R, Business Combinations. The disclosures required by the proposal would beeffective for annual financial statements for fiscal years ending after Dec. 15, 2008.6 • Financial Managers Update • September 16, 2008

Liquidity risk management from page 5that action plans are successfullyimplemented.Guglielmo said that manycommunity institutions are unpreparedfor closely adhering to the FDIC’sliquidity risk management guidelines.“A lot of banks don’t have thesufficient diversification of fundingsources,” he said. “Right now, I thinkthey’re kind of waking up with ahangover.”Such institutions may have reliedtraditionally on one or two alternativesfor obtaining liquidity. For example,some community institutions don’tutilize the repo market or Federal HomeLoan Bank advances for funding, heit will go back to $25—but they don’tknow which.”“Banking is a business ofconfidence—people have to beconfident that their money is safe, orthey’ll move it,” he said.Paulson said that in comingmonths the two GSEs will modestlyincrease their MBS portfolios throughthe end of 2009 in order to promotestability in the secondary mortgagemarket and lower the cost of funding.said. “So as a result, they are not aswell equipped as others who have morediversified funding sources.”“There are a number of institutionsthat really don’t know how muchliquidity they have available tothem—so a lot of them don’t realizethey have a problem until late in thegame,” he added.He suggested six steps thatinstitutions should take to strengthenthe liquidity risk-management process:determine how much liquidityyou have; estimate how much youneed; establish an early warningsystem; stress-test funding needs andavailability; outline management’sFannie, Freddie rescue from page 4Then, in 2010, their portfolios willbegin to be reduced gradually at therate of 10% per year, largely throughnatural run-off, as a way to addressthe problem of systemic risk.Looking to the future, he saidthat since the GSEs are chartered byCongress, only that body can addresscertain issues. “The new Congressand the next administration mustdecide what role governmentin general, and these entities inCompetitive strategyShifting to organic growth from branch expansionresponse for liquidity events; anddocument your process and periodicallytest liquidity sources.“Surprisingly, a lot of communityinstitutions have not thought throughthis exercise,” he said.Also, institutions must recognizethat when they need liquidity the mostis precisely the time when it’s mostdifficult to obtain. So it’s imperativeto develop an effective liquiditycontingency crisis plan.“A lot of banks are under-prepared,”Guglielmo said.Interested FMS members mayreview the guidance on liquidity riskmanagement in the FDIC section of theNews Archive on the FMS Web site atwww.fmsinc.org. FMUparticular, should play in the housingmarket,” he said.There is a consensus today thatthe GSEs pose a systemic risk, andthey cannot continue in their currentform, he said. “Government supportneeds to be either explicit or nonexistent,and structured to resolvethe conflict between public andprivate purposes.”Interested FMS members mayreview details on the bailout packagein the banking industry trends/issuessection of the News Archive on theFMS Web site at www.fmsinc.org. FMUA recent FMS White Paperexplains how community banks,thrifts and credit unions cansuccessfully integrate and executean organic growth strategy, whichcan help shore up the institution’sposition, supporting long-termviability and sustained growth.The paper, “Strategy for today’scompetitive marketplace,” pointsout that merger and acquisitionactivity within the financial servicesindustry has slowed to a crawl in2008. Despite this trend, manybanking executives often makethe mistake of seeing mergers,acquisitions or de novo branchingas the most probable means to growtheir businesses.Fortunately, however, currentmarketplace realities also haveprompted other institutions to takea different approach by shiftingtheir attention to organic growthopportunities. “As margins aresqueezed and spending is morecarefully regulated, organic growthhas become the most viable option forthose who simply cannot afford a costlyexpansionary strategy,” the paper says.The report, authored by BradyWalen, director of marketing, MarketInsights, Chicago, Ill., explains thatbefore an institution can hope todeepen relationships with currentcustomers and build loyalty, it mustfirst thoroughly understand itscurrent customer base.Collecting and using customerdata thus becomes a critical elementto understanding customers,deepening relationships andincreasing share of wallet. The goalis to identify trends among the mostattractive or profitable segments.“Effective organic growthstrategies require this level of deepunderstanding, as each customerdoes not present the same level ofopportunity,” the paper says.Interested FMS members mayreview the White Paper by accessingthe Members Only section of theFMS Web site at www.fmsinc.org. Or, members may call AlethaGalloway at 312-578-1300 to requesta copy. FMUFinancial Managers Update • September 16, 2008 • 7

100 West Monroe Street, Suite 810Chicago, Illinois 60603Return Service RequestedFirst Class MailU.S. PostagePAIDElgin, ILPermit No. 9FMS CalendarWebinarsSept. 25Oct. 7Oct. 8Oct. 9Oct. 20Oct. 22WorkshopsSan Antonio, TXOct. 20-21Oct. 22-23Atlanta, GANov. 17-18Nov. 19-20Boston, MADec. 8-9Dec. 9-10Dec. 10-11Pricing Loans & Deposits for GrowthHow to Apply Investment Basicsin the Current Crisis MarketCommercial Real Estate (CRE) Stress TestingInternal Fraud and Embezzlement:Lessons from the TrenchesLoan ImpairmentCommercial Mortgage Backed Securities:An Emerging Asset Class forCommunity BanksBest Practices in SOX & FDICIAThe CFO ExchangeLeveraging Your ALM Modeling ProcessRisk/Return Management BasicsThe Building Blocks of ALM for Credit UnionsSEC Reporting & UpdateStrategies for Growing Core DepositsFor more information, visit www.fmsinc.org/education.WebinarCommercial MortgageBacked Securities:An Emerging AssetClass for Community BanksOctober 22, 20082:00 p.m. EDT, 1:00 p.m. CDT,12:00 p.m. MDT, 11:00 a.m. PDTDespite the recent turmoil in the credit markets,the outlook for commercial mortgage backedsecurities (CMBS) is still positive.As with any security, there are risks and rewardsto weigh and community banks have only recentlybegun to consider AAA-rated CMBS classes due tothe yield and convexity advantages this asset classoffers. This convenient webinar will help you:n Examine the history of the CMBS market from astructural and credit perspectiven Discuss both the risks and rewards of CMBSn Walk through evaluations of specific CMBSbonds to determine how CMBS can help managethe portfolio duration and convexityVisit www.fmsinc.org/webinars for moreinformation and to register.